FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS
EXECUTIVE SUMMARY OF THE REPRESENTATION ON SERVICE TAX AMENDMENTS FOR
MUTUAL FUND DISTRIBUTORS/ AGENTS:
Vide S. No. 29 of notification No. 25/12-ST, exemption from levy of service tax has been
being withdrawn on services provided by a mutual fund agent or distributor to a mutual
fund or asset management company;
Service tax on services provided by a mutual fund agent or distributor to a mutual fund or
asset management company would now be levied on a reverse charge basis.
Service tax is a tax which is pass through in nature. It is to be borne by the recipient of the
service.
However, the distributor community is apprehensive that the service tax may
actually have to be borne by the mutual fund agents or distributors who are
the service providers
In the reverse charge mechanism, the effective Service Tax Rate works outs 16.28%.
If the mutual fund agents/ distributors are to absorb the service tax on Mutual Fund
commission, then the effective tax rate (for the highest tax slab) would be 45.26%.
Since the Service Tax is being charged on Reverse Charge Mechanism, no credit for service
tax on input is available to the mutual fund agents/ distributors.
Our humble Requests
We humbly request the following:
1)
To increase the maximum limit of TER as prescribed in regulation 52 of
The SEBI (MF) Regulations so as to allow service tax on commission paid
to mutual fund agents/ distributors to be charged to the scheme.
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FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS
REPRESENTATION ON SERVICE TAX AMENDMENTS FOR MUTUAL FUND DISTRIBUTORS/
AGENTS:
1.
Brief introduction of the organisation:
The Foundation of Independent Financial Advisors (FIFA) is an association of
independent financial advisors (IFA’s). We have been incorporated as a not for
profit organization u/s 25 of The Companies Act, 1956.
Our main objects are to educate, inspire, improve and develop Independent
Financial Advisors, to promote the value of independent financial advice and to
represent to and to help and promote the interest of IFA community with the
policy makers and regulators including to the Government, Reserve Bank of
India, The Securities Exchange Board of India (SEBI), Association of Mutual
Fund Industry (AMFI), Insurance Regulatory & Development Authority (IRDA),
Pension Fund Regulatory & Development Authority (PFRDA) and other bodies
on all matters relating to the Independent Financial Advisors.
The Foundation functions as a knowledge sharing platform for IFAs and
investors. It proactively engages with all stakeholders: the government,
regulators, manufactures and investors for a healthy development of financial
markets leading to favourable investor outcomes.
2.
Amendmends brought about by The Finance Bill 2015
Services provided by a mutual fund agent or distributor to a mutual fund or
asset management company is currently exempt from the levy of service tax.
However, vide S. No. 29 of notification No. 25/12-ST, exemption from levy of
service tax are being withdrawn on:
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FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS
(a) services provided by a mutual fund agent to a mutual fund or assets
management company;
(b) distributor to a mutual fund or AMC;
Further, service tax on services provided by a mutual fund agent or distributor
to a mutual fund or asset management company would now be levied on a
reverse charge basis.
3.
Fundamental Nature of any indirect tax levy
It will be appreciated that service tax is always borne by the recipient of the
service. In this case, the recipient of services is the mutual fund or the asset
management company. The person providing the service is only a conduit for
collecting and paying the service tax to the government. The tax is pass
through in nature.
4.
Impact of the amendments on mutual fund distributors/ agents.
A.
Who will bear the service tax?
In the case of mutual fund distributors, the service tax on commission should
be borne by the mutual fund or asset management companies. To illustrate, if
the commission paid to the mutual fund distributor is Rs 100, the service tax @
14% i.e. Rs 14/- should be paid by mutual fund or asset management company
directly to the governement (since the tax is payable under reverse charge
mechanism). Rs 100 should be paid to mutual fund distributor without any
dedcution.
However, the distributor community is apprehensive that the service tax may
actually have to be borne by the mutual fund agents or distributors.
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FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS
B.
How to pass Service tax to recipient of services:
To get a full understanding of the issue we give below extract Regulation 52 of
SEBI Mutual Fund Regulation governing the costs chargeable to the mutual
fund\scheme.
“Limitation on fees and expenses on issue of schemes
52 . (1) All expenses should be clearly identified and appropriated in the individual schemes.
4
[(2) The asset management company may charge the scheme with investment and
advisory fees which shall be fully disclosed in the offer document.]
(3) 1[***]
(4) In addition to the fees mentioned in sub-regulation (2), the asset management company
may charge the 1a[scheme] with the following expenses, namely:—
2
(a)
[***]
(b)
recurring expenses including:—
(i)
marketing and selling expenses including agents' commission, if any ;
(ii)
brokerage and transaction cost ;
(iii)
registrar services for transfer of units sold or redeemed ;
(iv)
fees and expenses of trustees ;
(v)
audit fees ;
(vi)
custodian fees ;
3
[(vii)
costs related to investor communication ;
(viii)
costs of fund transfer from location to location ;
(ix)
costs of providing account statements and dividend/redemption cheques and
warrants ;
(x)
insurance premium paid by the fund ;
(xi)
winding up costs for terminating a fund or a scheme ;
(xii)
costs of statutory advertisements ;] 4[***]
5
(vi)
[(xiia) in case of a gold exchange traded fund scheme, recurring expenses incurred
towards storage and handling of gold; 6[***]]
7
[(xiib)
in case of a capital protection oriented scheme, rating fees; 8[***]
9
[(xiic)
in case of a real estate mutual fund scheme, insurance premia and costs of
maintenance of the real estate assets (excluding costs of development of such
assets) over and above the expenses specified in regulation 52 to the extent
disclosed in the offer document; 10[***]]
11
[(xiid)
listing fees, in case of schemes listed on a recognised stock exchange; and]
12
[(xiii)]
such other costs as may be approved by the Board.
(5) Any expense other than those specified in sub-regulations (2) and (4) shall be borne by
the asset management company 13[or trustee or sponsors].
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FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS
1
[***]
[***]
3
[(6) The total expenses of the scheme excluding issue or redemption
expenses, whether initially borne by the mutual fund or by the asset management
company, but including the investment management and advisory fee shall be subject to
the following limits :—
4
[(a)
in case of a fund of funds scheme, the total expenses of the scheme including
weighted average of charges levied by the underlying schemes shall not exceed 2.50
per cent of the daily net assets of the scheme.]
(b)
in case of an index fund scheme or exchange traded fund, the total expenses of the
scheme including the investment and advisory fees shall not exceed one and one
half per cent (1.5 per cent) of the 5[daily] net assets;
(c)
in case of any other scheme—
(i)
on the first Rs. 100 crores of the daily 1[***] net assets 2.5 per cent;
(ii)
on the next Rs. 300 crores of the daily 1[***] net assets 2.25 per cent;
(iii)
on the next Rs. 300 crores of the daily 1[***]net assets 2.0 per cent;
(iv)
on the balance of the assets 1.75 per cent:
Provided that in respect of a scheme investing in bonds such recurring expenses shall be
lesser by at least 0.25 per cent of the daily 1a[***] net assets outstanding in each financial
year.]
2
[(6A) In addition to the limits specified in sub-regulation (6), the following costs or
expenses may be charged to the scheme, namely—
(a)
brokerage and transaction costs which are incurred for the purpose of execution of
trade and is included in the cost of investment, not exceeding 0.12 per cent in case
of cash market transactions and 0.05 per cent in case of derivatives transactions;
(b)
expenses not exceeding of 0.30 per cent of daily net assets, if the new inflows from
such cities as specified by the Board from time to time are at least—
(i)
30 per cent of gross new inflows in the scheme, or
(ii)
15 per cent of the average assets under management (year to date) of the
scheme,
whichever is higher:
Provided that if inflows from such cities is less than the higher of sub-clause (i) or
sub-clause (ii), such expenses on daily net assets of the scheme shall be charged on
proportionate basis:
Provided further that expenses charged under this clause shall be utilised for
distribution expenses incurred for bringing inflows from such cities:
Provided further that amount incurred as expense on account of inflows from such
cities shall be credited back to the scheme in case the said inflows are redeemed
within a period of one year from the date of investment;
(c)
additional expenses, incurred towards different heads mentioned under subregulations (2) and (4), not exceeding 0.20 per cent of daily net assets of the
scheme.]
2
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FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS
(7) Any expenditure in excess of the limits specified in 3[sub-regulations (6) and (6A)] shall
be borne by the asset management company 4[or by the trustee or sponsors].
(8) The provisions of sub-regulations (3), (4), (5) and (6) will come into effect 5[from 1st
April, 1997] for those schemes of mutual funds which have been launched prior to
notification of these regulations.”
Clause 52(6) of the regulation prescribes maximum limit on the Total Expenses
Ratio (TER) of the scheme including investment management and advisory fees
of the asset management companies.
Any expenditure in excess of the SEBI regulatory limits shall be borne by the
AMC or by the Trustee or the Sponsor.
Presently, all commission paid for Marketing & Selling expenses including
agent commission is debited to the scheme a/c.
If the service tax on commission to mutual fund distributors is to be charged to
the scheme, it will exceed the overall TER prescribed by SEBI. We give below
an illustration for better understanding .
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FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS
ILLUSTRATION
In this illustration, we have assumed that maximum TER @ 2% and service tax
on Investment and advisory fees charged by AMC in addition to maximum TER
is allowed to be debited to the scheme.
EXISTING
Current Scenario (%)
1
2
AMC Fees
ST
NEW
New Scenario (%)
1
0.14
1.00
0.14
1.14
3
4
Brokerage
ST
5
6
Others
0.7
0
0.7
1.14
0.7
0.10
0.80
0.3
2.14
0.3
2.24
7
Maximum TER + Service
Tax on AMC Fees (2%
+.14%)
2.14
2.14
8
Excess Amount of
Expenses that cannot
be charged to the
Scheme
0.00
0.10
In the illustration above, with the new service tax provisions, the total
expenses of the scheme will be 2.24% instead of 2.14% earlier.
Therefore, does it imply that 0.10% on account of Service Tax cannot be
debited to the scheme?
In such a situation, how does the addional service tax on commission to mutual
fund agents/distributors pass on to the recipient of the services?
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FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS
C.
To allow increase in TER to absorb service tax:
Regulation 52(4) of SEBI Mutual Fund Regulation governs costs that can be
charged to the mutual fund\scheme. All expenses including service tax levied
by the service provider (wherever applicable) is charged to the scheme. It is
only natural that the service tax now leviable on services rendered by mutual
fund agents/ distributors will also be charged to the scheme.
Presently, Service Tax on fees charged by the following service providers is
being debited to the scheme.
a.
b.
c.
d.
e.
AMC;
R&T Agent;
Auditors;
Trustees etc.
Professional fees
All stakeholders providing services in the entire value chain from the
manufacturer and intermediate service providers etc. are allowed to pass on
the service tax to the scheme.
As illustrated above the total expenses may increase and mutual fund
distributors are apprehensive that they may have to bear the service tax. In
order that justice is met and the levy is passed on to the final recipient of the
service, keeping in mind the fundamental nature of the tax, it is requested that
SEBI allows an increase in the TER to the extent of service tax chargeable on
brokerage paid to distributors.
D.
Effective rate of service tax is 16.28%:
In the Reverse charge mechanism, the effective Service Tax Rate works outs
16.28%. The calculation is given below:
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FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS
EFFECTIVE SERVICE TAX RATE
a
Gross Commission
100
c
Service Tax @ 14% ( Under
Reverse Charge Mechanism)
Net Amount Paid to Mutual
Fund Distributors if the service
tax is to be borne by the mutual
fund agent/ distributor
d
Effective Service Tax Rate (b / c)
b
14
86
16.28%
Therefore, in an eventuality that the mutual fund distributor bears the service
tax, his commission is being subject to 16.28% Service Tax instead of 14% as in
case of other services.
E.
Service tax will be levied as a direct tax
If the mutual fund agents/ distributors are to absorb the service tax on Mutual
Fund commission, then the effective tax rate (for the highest tax slab) would
be 45.26%. The calculations are given below:
EFFECTIVE TAX RATE UNDER DIFFERENT TAX SLABS:
Tax Rate under The
Income Tax Act
Service Tax Rate
Less: IT Savings on
service tax
Effective Tax Rate
30.90%
34.61%
16.28%
16.28%
5.03%
5.63%
11.25%
10.65%
42.15%
45.26%
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FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS
F.
Set off of input credit not available
Since the Service Tax is being charged on Reverse Charge Mechanism, no credit
for service tax on input is available to the mutual fund agents/ distributors.
Our Humble Request:
In view of the above we humbly request the following:
5.
1)
To increase the maximum limit of TER as prescribed in regulation 52 of
The SEBI (MF) Regulations so as to allow service tax on commission paid
to mutual fund agents/ distributors to be charged to the scheme.
16/A, 16th Floor, Nirmal Bldg., Nariman Point, Mumbai 400 021 T: +91-22-49120219 E-mail:[email protected]
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