Service tax to add to MF distributors' woes

Will eat 14% into their income

Sellers of mutual fund (MF) products have more reason to worry. After Association of Mutual Funds in India (Amfi)'s proposal to cap upfront commissions, the Union Budget has proposed to bring mutual fund distributors and financial advisors under the service tax net.

In the 2013-14 Budget, commissions paid to mutual fund distributors were exempted from service tax. But Finance Minister Arun Jaitley has now brought MF agents under its ambit. This essentially means that if a distributor gets Rs 100 as commission, the new proposal reduces the effective in hand income to Rs 86.

The move comes within a week of sector lobby Amfi's proposal to fund houses to cap upfront commissions to 100 basis points (bps).

Hemant Rustagi, CEO of Wiseinvest Advisors, said, "Withdrawal of service tax exemption will prove negative for the mutual fund distributors. They work at a minuscule margin and if they straightaway get 14% less how would they expand their business?"

Agrees Aashish P Somaiyaa, CEO of Motilal Oswal AMC. "The budget has created some headwinds for mutual funds’distribution by removing the service tax exemption for commissions paid out to distributors. Since the total expense to be charged on a scheme is capped by regulation, this charge will potentially result in reduced earnings for distributors and AMCs’ share of retention," he said. 

MF distributors' commission
Year   Commission payout (Rs cr)
2010-11	1,770
2011-12	1,884
2012-13	2,367
2013-14	2,603
2014-15*	5,000
* Industry sources' estimates
Source : Association of Mutual Funds in India

Interestingly, the government has made a 'U' turn on exemption at a time when industry, after a lull of more than five years, had started doing better in mobilising assets across the country, with accounts from smaller cities surpassing those opened in the top 15 cities.

In the meantime, Amfi also could rope in nearly 1 lakh mutual fund distributors - a much needed force of foot soldiers for penetration of mutual fund products. 

Post the Lehman Crisis, the number of distributors registered with Amfi had substantially reduced to less than 40,000. Currently out of the 1 lakh distributors, hardly 15,000 are active. Industry executives define active distributors as those who bring in at least 15-30 new applications every year.

With disproportionately less number of active distributors for a country of 1.25 billion people, any setback in terms of cut in commission can affect the industry.

However, some of the sector's top CEOs are not perturbed with the move. According to them, looking at the growth prospects over the next five years, distributors need to put in more effort in increasing their business. This will not only help them get more commission but also offset any impact arising out of the proposed exemption withdrawal, they added.