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DISTRIBUTORS/ AGENTS: Vide S. No. 29 of notification No. 25/12-ST, exemption from levy of service tax has been being withdrawn on services provided by a mutual fund agent or distributor to a mutual fund or asset management company; Service tax on services provided by a mutual fund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. 16/A, 16th Floor, Nirmal Bldg., Nariman Point, Mumbai 400 021 T: +91-22-49120219 E-mail:[email protected] C. I. N. - U74990MH2012NPL226953 – Website – www.fifiindia.org 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: 16/A, 16th Floor, Nirmal Bldg., Nariman Point, Mumbai 400 021 T: +91-22-49120219 E-mail:[email protected] C. I. N. - U74990MH2012NPL226953 – Website – www.fifiindia.org 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. 16/A, 16th Floor, Nirmal Bldg., Nariman Point, Mumbai 400 021 T: +91-22-49120219 E-mail:[email protected] C. I. N. - U74990MH2012NPL226953 – Website – www.fifiindia.org 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]. 16/A, 16th Floor, Nirmal Bldg., Nariman Point, Mumbai 400 021 T: +91-22-49120219 E-mail:[email protected] C. I. N. - U74990MH2012NPL226953 – Website – www.fifiindia.org 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 16/A, 16th Floor, Nirmal Bldg., Nariman Point, Mumbai 400 021 T: +91-22-49120219 E-mail:[email protected] C. I. N. - U74990MH2012NPL226953 – Website – www.fifiindia.org 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 . 16/A, 16th Floor, Nirmal Bldg., Nariman Point, Mumbai 400 021 T: +91-22-49120219 E-mail:[email protected] C. I. N. - U74990MH2012NPL226953 – Website – www.fifiindia.org 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? 16/A, 16th Floor, Nirmal Bldg., Nariman Point, Mumbai 400 021 T: +91-22-49120219 E-mail:[email protected] C. I. N. - U74990MH2012NPL226953 – Website – www.fifiindia.org 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: 16/A, 16th Floor, Nirmal Bldg., Nariman Point, Mumbai 400 021 T: +91-22-49120219 E-mail:[email protected] C. I. N. - U74990MH2012NPL226953 – Website – www.fifiindia.org 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% 16/A, 16th Floor, Nirmal Bldg., Nariman Point, Mumbai 400 021 T: +91-22-49120219 E-mail:[email protected] C. I. N. - U74990MH2012NPL226953 – Website – www.fifiindia.org 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] C. I. N. - U74990MH2012NPL226953 – Website – www.fifiindia.org
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