MFs won’t be loaded with service tax

NEW DELHI: This may bring some cheer to mutual fund (MF) investors. Fund houses will not be required to pay service tax on charges levied on investors at the time of purchase and sale of MF units. Had the tax been imposed, it would have been passed on to the investors by way of an increase in fees.

The Central Board of Excise & Customs (CBEC) has said the entry load and exit loads charged from investors by fund houses should not attract service tax. When an investor buys into a MF scheme, he has to pay a little over the price of the unit, called entry load. A similar payment, called exit load, is paid at the time of sale of the unit. Mutual funds use this money to recover scheme expenses on distribution, marketing, advertisement and road shows incurred at the time of set up.

The decision follows a judgement of the Central Excise and Service Tax Tribunal, which held that service tax could not be levied on entry and exit loads. ET reported on April 16 that the finance ministry was veering towards accepting this view.

CBEC has noted that “entry and exit load charges are not towards fund management service provided by the asset management company but to meet the initial issue expense and other specified expenses, incurred by the mutual fund”. The board has essentially distinguished between the initial expenses incurred by a fund house while starting out and recurring expenses incurred on account of the fees paid to the asset management company (AMC) to manage the pooled investments.

Service tax is levied on the fees paid by the fund house to the AMC, since it falls in the category of “asset management and other forms of fund management”. However, it has been explained that since issue expenses are amortised over the period of the scheme by way of the entry and exit load charges paid by investors, these do not come under the ambit of service tax.

“A service tax, if levied, would have been passed on to investors, which would have increased charges. The move to keep such charges out of the ambit is a good one,” PwC associate director R Muralidharan said.