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Dear CEO / CFO,
We need an urgent clarification from all fund houses on how each one is accounting for commissions paid to distributors, to enable us to determine which AMCs are enabling us to pass on the service tax incidence to the recipient of our services and which ones are not.
Cenvat credit mechanism
Service tax is a tax levied by the Central Government on services. It is the service user who pays this tax to the service provider, who in turn deposits it with the Government. While the service provider is responsible for paying the tax, he is equally entitled to recover this from the service recipient. All the services in the country (unless exempt) are covered under this tax, services like telephone, professional/consultancy fee, audit fee, commission, restaurants, maintenance contract, renting of commercial space etc.Every service provider (the AMC in your case) is also a service receiver. The AMC is the service provider to the mutual fund schemes and charges service tax on its management fee.
As a service receiver it pays service tax on the services it receives, like telephone, professional fee, audit fee, agent's brokerage etc. This phenomena of service tax in which service tax is levied on the income as well as expenses leads to a cascading effect. The Government doesn't want this to happen, that is why it introduced the system of Cenvat Credit. This allows every service provider to set off the service tax paid by it to a service provider against the service tax it receives from the service receiver and pay only the net amount to the government.
Our distribution agreements are with AMCs - not with schemes
It may be noted that a mutual fund distributor signs a distribution agreement with the AMC, under which he undertakes to distribute the AMC's schemes. He does not sign agreements with individual schemes. He provides a distribution service to the AMC, for which the AMC remunerates him with commission on schemes sold.
Now that service tax on distribution commissions is being levied under the forward charge mechanism, what should normally follow is that the distributor should raise a bill on the AMC for service tax that he is liable to pay on his commission income, and recover this from the AMC. The AMC can then set this off against service tax it charges to the schemes, pay only the net service tax to the Government.
Dual practices adopted by industry for service tax accounting
Our understanding is that the industry is following dual practices on accounting of service tax, which is creating confusion on recoverability of service tax that we pay on our commission income.
Marketing and Selling expenses including agent's commission are met from the AMC account. This is in line with what we discussed above as the proper scenario for service tax recovery.Such AMCs must reimburse the service tax to the agents and take 'cenvat credit' for the same. It will not increase any costs, will rather avoid double payment of service tax. Marketing and Selling expenses including agent's commission are met from the scheme account.To the extent that agent's commissions are debited directly to scheme accounts, the service tax set off is not available as the scheme is not a service provider in turn to anybody but is the final recipient of services. Debiting commissions directly to scheme account without passing through AMC books therefore does not allow for Cenvat credit as envisaged under the service tax laws.
In terms of SEBI regulations, the following extract clearly shows that an AMC is allowed to CHARGE the scheme recurring expenses including agent commissions. The operative word here is charge and not debit - which means that the AMC can pay recurring charges from its books including distribution commissions and in turn charge this to the scheme.
Extract from the Mutual Fund Regulations
Who is enabling recovery of service tax and who is not
What we need every AMC to clarify urgently to distributors is the accounting treatment for distribution commissions that they will be following wef April 2016. Those AMCs who debit commissions to AMC books will enable us to recover service tax from them. Those who debit commissions directly to schemes, are effectively not allowing us to recover our service tax, as we are being told that the regulator is not willing to allow such service tax to be passed on to scheme investors even though service tax on asset management fee has been allowed to be passed on.
It is important for us to have this clarity urgently, as the service tax incidence is a very substantial 15% on gross income, for all distributors who earn more than Rs. 10 lakhs annually in commission income.
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