Mutual Fund Agents/Distributors - Are they eligible for small scale exemption in 2016-17?

By Vijay Kumar

PARA 10.1 of the JS TRU letter of Budget 2016 (Service Tax) reads:

10.1 In Union Budget, 2015, as a policy decision to prune exemptions, the exemption to services provided by mutual fund agents/distributors to an asset management company was withdrawn. However these services were put under reverse charge liability, i.e., the Asset Management Company was made liable to pay service tax for the services received from such agents/distributors. Services provided by mutual fund agents/distributor to a mutual fund or asset management company are being put under forward charge, i.e. the service provider is being made liable to pay service tax. The small sub-agents down the distribution chain will still be eligible for small service provider exemption [threshold turnover of Rs 10 lakh/year] and a very small number will be liable to pay service tax. Accordingly, Rule 2(1)(d)(EEA) of Service Tax Rules, 1994 making service recipient, that is, mutual fund or Asset Management Company as the person liable for paying service tax is being deleted along with consequential changes in notification No. 30/2012-ST.

In view of the above changes, the mutual fund agents have to pay Service Tax from the year 2016-17 under direct charge. It is learnt that these mutual fund agents were advised by their Asset Management companies to claim exemption up to a value of Rs 10 lakhs in the year 2016-17, irrespective of the amount of commission received by them in the year 2015-16, as these agents are paying Service Tax for the first time.

However, some of the agents are apprehensive that they may not be eligible for small service provider exemption if their commission in the preceding year exceeded 10 lakhs as technically it is the Service income received though the liability had been discharged by the Asset Management companies under reverse charge.

There is also another view. Since para 3 of the Notification No 33/2012-ST, dated, June 20, 2012 excluded turnover which is taxable under reverse charge under Sec 68(2) from "aggregate value" for the purpose of small scale exemption in respect of GTA service, the same logic applies to mutual fund agents also and they are entitled to exemption up to 10 lakhs in the year 2016-17.

It looks as if the advisory given by the Mutual Fund Companies has been misunderstood by many of the Mutual Fund Distributors. For example, the clarification given by SBI Mutual Fund was this:

4. How to compute the threshold of Rs 10 Lac for the benefit of small scale provider?

Ans: The threshold for the benefit of small scale service provider should be computed by including all taxable services provided by the distributor (including but not restricted to distribution commission from sale of MF, distribution commission from sale of Insurance policy, advisory fee and any other professional fee etc.).

5. How distributor may avail the benefit of small scale service provider during current financial year?

Ans: The Distributor may avail the benefit of small scale service provider on the basis of their gross taxable services provided in the previous and the current financial year. Following are the scenarios to understand the applicability of service tax for distributor.

Reliance Capital Asset Management Ltd also gave similar clarifications.

Today is the last day for these agents/distributors to file their first return after they became liable to pay the tax from April 2016. And many agents are confused about liability on that 10 lakh rupees.

Will CBEC issue a clarification without waiting for an audit objection running into crores?