Good news for investors as they remain unaffected with service tax on mutual funds

By Vipin Agnihotri

Contrary to the general belief, service tax will not be levied on entry and exit load charged by a mutual fund. Indian government through a circular clarified this. What’s more, highly placed sources in the government inform The India Street, that the service tax on construction industry has been lowered from previous 4 percent to 2 percent.

The pivotal factor here is that in the budget, UPA government included asset management and all other fund managements under the sub head of banking and other financial services to levy service tax at 12 percent. “Making use of the act, the tax department charged the service tax on entry and exit load also, which an investor pays at the time of buying and selling of mutual fund units,” pointed out Shalabh Saxena, Business reporter of The Pioneer adding that this made the industry to raise the issue before the government.

In my opinion, government rightly found that entry and exit load charges have no attachment to fund management service offered by the asset management company but meet the starting issue expense and other expenses of a mutual fund. Fact remains that as these expenses are not in the ambit of service tax at the moment, the department has no power to levy service tax on buying and sale of units.

Point to be noted here is that entry and exit load charges at this moment of time vary between 2 percent and 4 percent. Taking this into account, one can safely say that this ruling will lead to a savings of 0.25 percent to 0.50 percent for investors. Though, the service tax on the fees charged by asset management company will continue. It is worth mentioning in this regard that in a mutual fund, an asset management company implements the fund management routine.

Moreover, the fees charged by the asset management company is chargeable to service tax under ‘fund management service’ category. On the other hand, service offered by the distributors, selling agents, brokers, custodians and trustee to the fund is also taxable in nature under respective services such as auxiliary service, stock broking and other sort of financial services.

If one analyzes the new notification of government, one thing is for sure; provider of contract service will be charged service tax of 2 percent of the total value of the contract, which was 4 percent. Furthermore, in the case of service tax on work contract, the government has offered an abetment of 67 percent of the total value of the contract against the cost of materials such as steel, cement, wood and other fixtures used in implementing the works contract. While calculating the service tax, government has also excluded the property tax paid on an immovable property from its commercial rental income.