1. finance
2. investing
3. funds
4. mutual funds

 F
FOUNDAT
ION OF IN
NDEPEND
DENT FINA
ANCIAL ADVISORS
A
S
Date 13th March 2015
5 To, The Ho
onourablee Finance Minister
Shri Arrun Jaitleyy Respeccted Sir, REPREESENTATIO
ON ON SERVICE TAX
X AMEND
DMENTS FO
OR MUTU
UAL FUND
D DISTRIIBUTORS// AGENTS:: 1.
Brief intro
oduction o
n: of the orgganisation
The Fo
oundation
n of Indeependent Financial Advisors (FIFA) iss an association off indepeendent fin
nancial ad
dvisors (IFFA’s). We have bee
en incorpo
orated as a not forr profit organizatiion u/s 25
5 of The Co
ompanies Act, 1956
6. Our m
main objects are to
o educatee, inspire, improvee and develop Ind
dependentt Financcial Adviso
ors, to pro
omote the
e value off indepen
ndent financial adviice and to
o repressent to an
nd to help
p and pro
omote thee interest of IFA co
ommunityy with thee policy makers and regulators including to th
he Government, Resserve Bank of India, Board of In
ndia (SEBII), Association of Mutual Fund Industryy The Seecurities Exchange B
(AMFI)), Insuran
nce Regulatory & Developm
ment Auth
hority (IRDA), Penssion Fund
d Regulaatory & Developme
D
ent Autho
ority (PFRD
DA) and other bodies on all a matterss relatin
ng to the In
ndependeent Financcial Adviso
ors. The Fo
oundation functionss as a kno
owledge sh
haring platform for IFAs and investors. , It pro
oactively engages with all stakeholders: th
he govern
nment, regulators
r
manuffacturers and investors for a health
hy development off financial marketss leadingg to favou
urable inveestor outccomes. th
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F
FOUNDAT
ION OF IN
NDEPEND
DENT FINA
ANCIAL ADVISORS
A
S
2.
Amendmends brou
ught abou
ut by The FFinance B
Bill 2015 Servicees provideed by a mutual fund
d agent or distributtor to a m
mutual fun
nd or assett managgement co
ompany is currentlyy exempt ffrom the leevy of serrvice tax. Howevver, vide S. No. 29
9 of notiffication No. 25/12‐‐ST, exem
mption from levy off servicee tax are b
being with
hdrawn on
n: (a) seervices prrovided by b a muttual fund agent to
o a mutu
ual fund or assetss managgement co
ompany; (b) disttributor to
o a mutuaal fund or A
AMC; Furtheer, service tax on seervices pro
ovided byy a mutuall fund age
ent or disttributor to
o a mutu
ual fund o
or asset m
managemeent compaany would
d now be levied on a reversee chargee basis. Fundame
ental Natu
ure of any indirect ttax levy 3.
It will be appreeciated th
hat service tax is always a
bo
orne by th
he recipieent of thee nt of services is the mutual fund or the assett servicee. In this case, thee recipien
managgement co
ompany. The perso
on provid
ding the service s
is only a co
onduit forr collectting and paying the service taax to the ggovernmeent. The taax is pass tthrough in
n naturee. 4.
Impact off the amendments on mutuaal fund disstributors// agents. A.
Who will bear the service taax? In the case of m
mutual fun
nd distribu
utors, thee service tax on com
mmission should bee borne by the mutual m
fun
nd or asseet manageement com
mpanies. To illustraate, if thee commission paid to the m
mutual fund distrib
butor is Rss 100, the service tax @ 14%
% i.e. Rs 14/‐ shou
uld be paid
d by mutu
ual fund or asset maanagemen
nt compan
ny directlyy th
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F
FOUNDAT
ION OF IN
NDEPEND
DENT FINA
ANCIAL ADVISORS
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S
to the government (sincee the tax iss payable under revverse charge mechaanism). Rss hould be p
paid to mu
utual fund distributo
or withoutt any dedu
uction. 100 sh
Howeever, the
e distribu
utor com
mmunity is appre
ehensive that the
e service
e tax m
may actu
ually havve to be
e borne by the mutual fund aggents orr distrib
butors. B.
How to pass Servicce tax to recipient o
of servicess: To gett a full un
nderstanding of thee issue wee give bellow extracct Regulattion 52 off SEBI Mutual M
Fu
und Regu
ulation go
overning the t
costss chargeable to th
he mutual fund\sscheme. “Limittation on fees and e
expenses on issue o
of scheme
es 52. (1) All expen
nses shoulld be clearly identiffied and ap
ppropriateed in the individual mes. schem
4[(2) TThe asset managem
ment company mayy charge tthe schem
me with investmentt and ad
dvisory fees which sshall be fu
ully disclossed in the offer doccument.] (3) 1[****] (4) In
n addition to thee fees mentioned
m
d in sub
b‐regulatio
on (2), the t
assett managgement co
ompany m
may chargge the 1a[sscheme] w
with the ffollowing eexpenses, namely:— (a) 2[***] (b) recurring includiing:— expensses ((i) markketing and
d selling expenses in
ncluding aagents' commission, if any ;
th
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FOUNDAT
ION OF IN
NDEPEND
DENT FINA
ANCIAL ADVISORS
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S
(iii) brokkerage and
d transacttion cost ;
(iiii) regisstrar services for traansfer of u
units sold or redeem
med ; (ivv) fees and expeenses of trustees ;
(vv) audit fees ; (vvi) custo
odian feess ; 3[(viii) costss related tto investo
or commun
nication ;
(viiii) costss of fund ttransfer frrom locatiion to locaation ;
(ixx) costss of pro
oviding acccount sttatementss and dividend/reedemption
n cheq
ques and w
warrants ; (xx) insurance premium paid
d by the fund ;
(xxi) wind
ding up co
osts for terrminating a fund or a scheme
e ; (xiii) costss of statuttory adverrtisements ;] 4[***]]
(vvi) 5[(xiia) in casse of a gold g
exchange trad
ded fund scheme, recurringg expeenses incu
urred towaards storage and haandling of gold; 6[****]] 7[(xiib
b) in caase of a caapital protection oriented sch
heme, rating fees; 8[***]
9[(xiicc) in caase of a real r
estatte mutual fund sch
heme, insurance prremia and
d costss of main
ntenance of the reeal estatee assets (excludingg costs of deve
elopment of such assets) oveer and abo
ove the exxpenses sp
pecified in
n regu
ulation 52 to the exttent disclo
osed in the
e offer document; 1
10[***]] 11[(xxii listin
ng fees, in
n case of sschemes listed on aa recognizzed stock exchangee; d
d) and]] 12[(xiii Such
h other costs as mayy be appro
oved by th
he Board.
th
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FOUNDAT
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NDEPEND
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ANCIAL ADVISORS
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S
)] (5) An
ny expense
e other th
han those specified in sub‐reggulations (2) and (4
4) shall be bornee by the assset management company 1
13[or trusttee or spo
onsors]. 1[***] 2[***] 3[(6) TThe total expenses of the scheme exccluding issue or redemption eexpenses, wheth
her initiallly borne by the mutual fund f
or by the asset a
man
nagementt the invesstment maanagemen
compaany, but including i
nt and ad
dvisory feee shall bee subjecct to the following limits :—
4[(a) in casee of a fun
nd of fund
ds schemee, the total expensses of thee scheme includiing weigh
hted average of charges levied byy the un
nderlying schemes shall not n exceed
d 2.50 per cent of the daily net assetts of the scheme.] (b) in case
e of an in
ndex fund
d scheme or exchange tradeed fund, the t total expensses of thee scheme
e includingg the inveestment and a advissory fees shall not exceed
d one and one half p
per cent (1.5 per ce
ent) of thee 5[daily] net asssets; (c) in case
e of any otther schem
me—
(i) on the
e first Rs. 1
100 croress of the daily 1[***
*] net asseets 2.5 per cent; (ii) on thee next Rs.. 300 crorres of thee daily 1[*
***] net assets 2.25 peer cent; (iii) on the
e next Rs. 300 crorees of the d
daily 1[****]net asseets 2.0 per cent; (iv) on thee balance o
of the asse
ets 1.75 per cent:
th
16/A, 16 Floor, Nirmal Bldg., Nariman Point,
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FOUNDAT
ION OF IN
NDEPEND
DENT FINA
ANCIAL ADVISORS
A
S
Provid
ded that in
n respect of a scheme investting in bonds such recurring expensess shall be lesserr by at least 0.25
5 per cent of the
e daily 1a[***] 1
net assetss each finan
ncial year.] outstaanding in e
2[(6A)) In addition to the limits spe
ecified in ssub‐regulaation (6), the follow
wing costss or exp
penses maay be charrged to the
e scheme,, namely—
— (a) brokerrage and ttransactio
on costs w
which are incurred ffor the pu
urpose of executtion of trrade and is includ
ded in the
e cost off investm
ment, not exceed
ding 0.12 per cent in case of o cash maarket tran
nsactions and 0.05 per cen
nt in case of derivattives transsactions;
of 0.30 peer cent of daily net assets, if the new (b) expensses not exxceeding o
inflowss from succh cities as specified by the B
Board from
m time to time are at least— (i) 30 perr cent of gross new inflows in the schem
me, or
nt (year to
o date) (ii) 15 perr cent of tthe averagge assets under maanagemen
of the scheme, whiche
ever is higgher:
Provided that iff inflows ffrom such cities is lless than the higheer of sub‐
clause (i) or sub‐clause (ii), ( such expenses on daily net assetts of the scheme shall be charged o
on proporrtionate basis: Provided furtheer that expenses charged c
u
under thiis clause shall be utilised
d for disttribution expenses incurred for bringing inflo
ows from such ciities: Provided furtheer that amount a
in
ncurred as a expensse on acccount of n case the inflowss from succh cities shall be creedited bacck to the sscheme in
said inflows are redeemed within aa period o
of one yeaar from the date of investm
ment; th
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FOUNDAT
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ANCIAL ADVISORS
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(c) Additio
onal expeenses, incurred to
owards different d
heads mentioned under sub‐regullations (2)) and (4), not excee
eding 0.20
0 per centt of daily net asssets of thee scheme.] (7) An
ny expend
diture in excess of tthe limits specified in 3[sub‐regulation
ns (6) and (6A)] shall be borne b
by the t asset managem
ment company 4[orr by the ttrustee orr sponsors]. he provisio
ons of sub‐regulations (3), (4), ( (5) an
nd (6) willl come in
nto effectt (8) Th
5[from
m 1st Aprril, 1997] for thosee schemes of mutu
ual funds which have been launch
hed prior to notificaation of th
hese regulations.” limit on the Total Expensess Clausee 52(6) of the regu
ulation pre
escribes maximum m
Ratio ((TER) of th
he schemee including investm
ment manaagement aand adviso
ory fees off the assset managgement co
ompanies.. Any exxpendituree in excesss of the SSEBI regulaatory limitts shall be
e borne byy the AMC
C or by tthe Trusteee or the SSponsor. Presen
ntly, all trrail fees paid p
for Marketing
M
g & Sellin
ng expensses includ
ding agentt commission is debited to the schem
me a/c. If the sservice tax on trail commissiion to mutual fund distributo
ors is to b
be charged
d to the scheme, it will exceeed the ovverall TER
R prescribe
ed by SEBI. We givee below an
n better und
derstandin
ng . illustraation for b
th
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FOUNDAT
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ILLUSTTRATION In this illustratio
on, it is asssumed th
hat the maaximum TTotal Expe
ense Ratio
o (TER) iis 2% E
EXISTING
NEW Curren
nt Scenario(%) Ne
ew Scenarrio(%)
1 A
AMC Fees 1
1.00 2 SService Tax @ 14% o
on above
0
0.14
0.14 3 C
Commissio
on to Distributors
4 SService Tax @ 14% o
on above
5 O
Other Costt 0.23
0.23
6 Total Costt 2.00
2.09
7 M
Maximum TER perm
missible ass p
per SEBI (M
MF) Regulation ((Assumed) (Note 1)) 2.00
2.00
8 EExcess Exp
penses thaat cannot b
be charged to the SScheme 0.00
0.09
1.14
0
0.63
0
1.14
0.63 0.63
0.09 0.72
(Note 1
1): In this illu
ustration we have assu
umed that m
maximum TER @ 2% In the illustratio
on above, w
with the n
new servicce tax provisions, th
he total exxpenses off heme will be 2.09%
% instead o
of 2% earliier. the sch
th
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FOUNDAT
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Thereffore, doess it imply tthat .09%
% on accou
unt of Servvice Tax caannot be d
debited to
o the sch
heme? In such
h a situation, how does the addional service taax on com
mmission to mutual fund agents/d
distributorrs pass on to the recipient of the services?? Effective rate of se
ervice tax is 16.28%
%: C.
m
m, the efffective Service Tax Rate works w
outss In thee Reverse charge mechanism
16.28%
%. The calculation iss given below: EFFECTIV
VE SERVIC
CE TAX RATTE
a G
Gross Com
mmission
100 b SService Tax @ 14% ( Under Reeverse Ch
harge M
Mechanism
m) 14 c Net Amou
N
unt Paid to
o Mutual FFund D
Distributo
rs if the seervice tax is to be b
borne b
by the mu
tual fund agent/ disstributor
86 d E
Effective S
Service Taxx Rate (b // c)
16.28% Thereffore, in an
n eventuallity that th
he mutual fund disttributor be
ears the seervice tax, his commission
n is being ssubject to 16.28% SService Taxx instead of 14% as in case off other sservices. th
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FOUNDAT
ION OF IN
NDEPEND
DENT FINA
ANCIAL ADVISORS
A
S
D.
Service taax will be levied as a direct taax If the mutual fu
und agentts/ distrib
butorsare to absorb
b the servvice tax on o Mutual Fund ccommissio
on, then tthe effective tax rate (for the highest tax slab) would bee 45.26%
%. The calculations are given below: EFFECTTIVE TAX RATE UND
DER DIFFEERENT TAX
X SLABS:
Withou
ut Surcharge
Tax Raate under TThe Incom
me Tax Actt
Wiith Surchaarge
30.9
90%
34
4.61%
Servicee Tax Ratee Less: ITT Savings on servicee tax
16.28%
%
16.2
28% 5.03%
%
5.6
63% 11.2
25%
10
0.65%
Effecttive Tax Raate 42.1
15%
45
5.26%
E.
Set off of input cre
edit not avvailable Since tthe Servicce Tax is being b
charged on Reverse R
Charge C
Meechanism, no creditt for serrvice tax o
on input is available to the mu
utual fund
d agents/ d
distributors. th
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FOUNDAT
ION OF IN
NDEPEND
DENT FINA
ANCIAL ADVISORS
A
S
5. Our humb
ble Reque
ests w of the ab
bove we h
humbly request the followingg: In view
1) To withdraw the amendme
a
ent to S. No. 29 of o notificaation No. 25/12‐STT, ption to fro
om levy of service ttax on: thereby reestoring the exemp
(a) services provvided by aa mutual ffund agen
nt to a mu
utual fund
d or assetss management company; o a mutuaal fund or A
AMC; (b) disttributor to
2) In the altternative, to increaase the maximum limit l
of TEER as prescribed in
n regulation
n 52 of The T SEBI (MF) Regu
ulations so
o as to allow serviice tax on
n commission paid to
o mutual fund agents/ distriibutors to
o be chargged to thee scheme. ng you. Thankin
Yours trruly, Mehta Dhruv M
Chairma
an FOUNDA
ATION OF IN
NDEPENDENTT FINANCIALL ADVISORS
16A, 16tth Floor, Nirmal, Nariman
n Point, Mum
mbai 400021
1 T: +91 22 4912 0219
9(D) 8108877555
5 M: +91‐8
Email: [email protected] th
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