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Budget blow on MF distributors

Service tax exemption to be removed; trade fears dampener on expansion; also, minor increase in income distribution tax on certain funds

Chandan Kishore Kant & Sachin P Mampatta  |  Mumbai 

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Sellers of mutual fund (MF) products, already under water over the proposal to cap upfront commissions, have been dealt another blow in the proposals.

The proposal to bring and financial advisors under the service tax net is expected to make a serious dent to their income. Finance Minister has not only raised service tax from 12.36 per cent to 14 per cent but removed MF agents from the list of those exempt from paying it.
Read our full coverage on Union Budget In the 2013-14 Budget, commissions paid to these distributors had been so waived. It is now sought to be re-imposed.


The total commission payout to is expected to be around Rs 5,000 crore this year. The service tax would be applicable from April 1. Distributors are being brought under the service tax net at a time strong investor inflows are seen in MF schemes.

Going ahead, if a MF seller is paid a commission of Rs 100, the realisation would be Rs 86. It remains to be seen whether the fund house or the agents will bear the brunt but the overall cost of selling the product will definitely go up, say sector officials. This comes when the Association of in India has proposed to cap the upfront commission paid to distributors at 100 basis points (bps), to rein in high fees paid to agents.

“Since the total expense to be charged on a scheme is capped by regulation, this (Budget) charge will potentially result in reduced earnings for distributors and asset management companies’ share of retention,” said Aashish Somaiyaa, chief executive officer,

“Withdrawal of will prove negative for MF distributors, who already work on minuscule margins,” said Hemant Rustagi, CEO of

Another Budget announcement that could negatively impact the segment is the proposal to impose higher tax on income distribution in certain MF schemes, including exchange-traded funds.

The position on equity MFs has not changed, with zero tax on dividend distribution. However, there would be marginally higher taxes on income distribution by MF schemes other than equity-oriented debt funds. The increase is on account of the rise in surcharge levied from 10 per cent to 12 per cent.

Accordingly, the government will be taxing MF dividends at a rate which is up to 88 bps higher than before, according to an analysis by tax consultants PwC. The effective tax rate for individuals and Hindu Undivided Families will rise from 37.77 per cent to 38.45 per cent (68 bps). For persons other than individuals and HUFs, it will increase from 48.56 per cent to 49.44 per cent (88 bps). It will increase from 5.96 per cent to 6.07 per cent (11 bps) for non-resident Indians who have invested in infrastructure debt funds.

The ongoing financial year has been very positive for the MF sector, with total assets under management nearly at Rs 12 lakh crore. Sales of equity MF products are set to reach a new high. Sector officials said the move to impose service tax would be a dampener for expansion of MFs. The number of active had seen a big decline after the market regulator's decision to abolish entry load. Some top sector officials, however, say the tax burden will force distributors to work harder, with investor sentiment being favourable.

First Published: Mon, March 02 2015. 22:50 IST
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