Funds seek hike in AMC expense cap

After hectic consultations between the asset management companies (AMCs) and distributors of mutual funds on the service tax issue, the Association of Mutual Funds of India (AMFI) has written to the Securities and Exchange Board of India (Sebi) seeking an upward revision in the maximum expenses that AMCs can charge funds.

This is a direct fall-out of the 8 per cent service tax which, the income tax department has clarified, the distributors will have to pay. Industry sources said various options were being thrashed out by both AMC managers as well as distributors.

According to the Central Board of Excise and Customs (CBEC), the services of the distributors are commisionable and hence subject to service tax under the definition of "auxiliary services".

According to the tax authorities, AMCs receive the services offered by the distributors but it is not clear from whom the service tax is recoverable "" the AMCs or the investors.

According to the Association of Financial Planners, "in case Sebi permits an increase in the cap on expenses, investors will be the recipients. Otherwise the AMCs will be treated as receipients." So this is a tricky issue, which has to be resolved by the Sebi.

At present, Sebi considers the levy of service tax on mutual funds an expense, which should be included in the total expense ratio limits and any excess of MF expenses over this level have to be borne by the trustees, the AMC or the sponsors.

While nobody is willing to comment on the outcome, the broad thinking is that the AMCs will have to bear a part of the service tax. At present AMCs' expenses are capped at 6 per cent. If they have to bear a part of the distributors' service tax load as well, it might be difficult for them to sustain it at this level. Incidentally, AMCs have been in the ambit of the service tax for the last two years. In the case of distributors, the tax became applicable from July last year. AMCs also fear that bearing a part of the service tax burden will strain their bottomlines and thin their margins.

There is a reluctance on the part of the AMCs to pass on the cost of the service tax to investors, since the industry is still at a stage where it will not like to antagonise prospective investors.

Naval Bir Kumar, managing director, Standard Chartered Mutual Fund, said, "Investors should not be bothered about the costs. What ultimately matters is the returns investors get and whether it is in line with their expectations and objectives."

This is a line echoed by many others in the industry, but still there is reluctance to put it into practice. Distributors, however, feel that the customer should be made to pay for it, much like what happens in the insurance sector, where this is the norm.