Service tax blues force MFs to raise load

Mutual funds (MFs), despite the Delhi High Court squashing an income-tax department circular which imposed service tax on MF distributors, are not giving up on their efforts to find a solution in the eventuality of the tax being ultimately imposed.

"This is just a temporary reprieve," said Ashutosh Bishnoi, chief marketing officer of UTI Mutual Fund.

Mutual funds have already started increasing their exit and entry loads. Birla Mutual Fund will shortly be hiking its loads by around 25 basis points.

Franklin Templeton and HDFC Mutual Fund have already hiked their loads and others are planning to follow suit. A P Kurian, chairman of the Association of Mutual Funds of India, said he would have to see the entire order before commenting. Industry circles said the court ruling was open to an appeal by the income-tax authorities.

Distributors will, however, be saving on a huge outgo since the payment of service tax, according to the circular issued by the I-T department in November last year, was effective from July 2003.

The Central Board of Excise and Customs (CBEC) had issued a clarification saying that the distributors will be liable to pay service tax at 8 per cent. The quantum of this tax is expected to go up next year.

Last month, Karvy Consultants, a leading mutual fund distributor, had moved the Hyderabad High Court against the service tax implementation and the court stayed the implementation of the circular, asking the government to file a suitable reply.

The Delhi High Court's ruling comes in response to an appeal filed by Bajaj Capital, one of the largest distributors of financial products, challenging the circular, which was issued in the form of a clarification.

Since the circular was issued, there have been hectic consultations among various parties involved as to who should bear the tax. Distributors said asset management companies should take it upon themselves and ultimately pass it on to investors.

The AMCs were, however, a bit reluctant to pass on any further expenses to investors as they feel that the renewed interest in mutual funds might be jeopardised.

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On the offensive

• Mutual funds have already started increasing their exit and entry loads.
• Birla Mutual Fund will shortly be hiking its loads by around 25 bps.
• Franklin Templeton and HDFC Mutual Fund have already hiked their loads.
• Others are planning to follow suit.