FEBRUARY 28, 2015

By Pratik Shah, CA and Jigar Doshi, CA

SERVICES provided by mutual fund agents or distributors to mutual fund (‘MF') or Asset Management Company ('AMC'), as the case may be, were liable to service tax under reverse charge mechanism (RCM) prior to the negative list regime. As a boost to the mutual fund industry which was agitated over the levy, the said services were removed from the RCM ambit in the negative list regime wef 1 July 2012.

Now, vide Notification 7/2015 – Service Tax dated 1 March 2015 the Finance Ministry has brought back this levy by removing the said exemption and taxing the services in hands of AMC or MF (taxing under full reverse charge).

Given the above, distribution of mutual funds would again attract service tax and it is now the decision of mutual fund houses to whether absorb this tax / to provide relief or to pass on the same.

The Centre's move to remove service tax exemption to mutual fund agents / distributors would lead to inflating the costs to the investors. This is because in case of MF's, there is no Cenvat credit availability as no output service tax liability on purchase and sale of units.

It would be relevant for the MF industry to evaluate the impact of the said change and optimise the taxes if there is any possibility. Also tracking of records pertaining to one time / trail commission to the agents / distributors would be of paramount importance to MF industry enabling them to make payment of service tax under RCM.

The above change is effective from 1 April 2015.

(The authors are Partner and Senior Manager of SKP Business Consulting LLP and the above views expressed are personal.)