Mutual Fund industry wants investors to bear service tax burden

NEW DELHI: Mutual Fund houses will benefit at the cost of investors if the government accepts the proposal of the industry to shift the burden of service tax on buyers and allow it to raise administrative fees and other expenses.

These proposals were mooted by the Mutual Fund industry at a meeting today with the officials of SEBI and Finance Ministry, which among others were attended by Economic Affairs Secretary R Gopalan.

The ministry has called a meeting in deference to the wishes of Prime Minister Manmohan Singh, who had last week suggested that efforts should be made to resolve the problems of the MF industry, which is witnessing decline in collection since 2009-10.

The MF industry has pitched for raising expense ratio, which includes administrative fee and marketing cost, by 25 basis points. Besides, they also made a case for doing away with the sub-ceilings under the expense ratio and pass on the burden of 12 per cent service tax to investors.

"Service tax should be borne by investors and should be kept out of the total expense ratio. We discussed how to increase retail participation. We have asked them to increase the total expense ratio to 2.25 per cent," Association of Mutual Funds of India(AMFI) CEO H N Sinor said.

However, from the point of view of investors, MFs would become less attractive as their actual investment in schemes would come down while the asset management companies (AMCs) would pocket a larger portion as management fees.

Later finance ministry in a statement said, "the immediate plan includes steps that may have to be taken to energise the distribution network and to provide greater flexibility to AMCs to manage the total expense ratio".

The MF industry also made a case for managing the assets of insurance companies, floating pension schemes, like those available in Europe, with tax incentives. Besides, more benefits to MFs if they operate in smaller towns.

"By the end of the month there could be resolution of some of the issues. We will also see to what extent the AMCs can get to manage the assets of the insurance companies," a finance ministry official said.

The gross resource mobilisation by the MF industry has come down to Rs 68 lakh in 2011-12, from Rs one crore in 2009-10.

On the issue of re-introduction of commission for brokers, also known as entry load, Sinor said, "we have not raised entry load issue. Only distributors mentioned it. It is a 3-year old matter and the MF industry did not believe in reviving the issue."

The entry load of 2.25 per cent which was paid as commission to distributors of mutual funds, was banned in 2009 by the then SEBI chief C B Bhave, who felt that investors were being taken for a ride by distributors who encouraged investors to churn their portfolios. The ban, however, led to drying up of inflows into mutual funds.