Why MF agents are laughing their way to the bank

Having been battered by life-changing regulatory moves for over a couple of years now, mutual fund distributors finally have something to smile about. The finance minister has given a significant relief by exempting their services from the ambit of service tax of 12 per cent.

According to a notification on Saturday, the "services rendered by a mutual fund agent or distributor to mutual fund or asset management company for distribution or marketing of mutual fund" form part of 34 items exempt from service tax.

"The government, being satisfied it is necessary in public interest so to do, exempts the following taxable services from the whole of the service tax leviable thereon under section 66 B of the Finance Act," said the notification.

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Distributors are relieved. K Ramesh Bhat, chief executive, IFA Galaxy, a Chennai-based group of independent financial advisors (IFA), said, "It is big relief. Asset management companies used to directly deduct this 10.3 per cent from the commissions payable. And, since it was not in the nature of tax deducted at source (TDS), we could not even set it off against expenses. Distributors had to bear it all themselves. They could not pass it on, too."

The move will put more cash in the hands of all classes of distributors, including IFAs, corporate distributors and banks, say experts. For example, an IFA earning Rs 8,970 will earn Rs 10,000 post the changes, Bhat said, adding, "It will 100 per cent help the industry, which is facing difficult times."

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Private banks such as HDFC Bank and ICICI Bank, which earn a significant income through the distribution of financial products, are set to gain, say analysts.

The industry has been facing heavy attrition after the Securities and Exchange Board of India (Sebi) abolished upfront commissions in 2009. Many small distributors either quit or moved to selling other products such as insurance policies and bonds which offered higher remuneration.

Even last year's move by Sebi to introduce a fee of Rs 100 for investments of Rs 10,000 or more has not been able to revive interest amid lacklustre equity markets.

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Coming in this backdrop, the Centre's move will free up cash for expansion at a time when inflows have been erratic, says Rajiv Bajaj, managing director, Bajaj Capital, a national distributor.

"The timing could not have been better. Business has not been great for the past three-four years. The service tax was a big drain on our resources. The government move would help us invest in the expansion of distribution," he added.

Apart from increasing the cash flow in new businesses, MF agents will also take home 11 per cent more on past efforts.

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Trail commissions, the fee paid by fund houses based on assets contributed by the distributor at the end of the year, will also go up.

Amidst a lack of new business, trail commission was a major source of revenue for distributors who hung on.

"Whatever little we were earning on trail used to be shrunk by the service tax," said Bhat. "We had made a lot of representations soon after the tax was introduced five years ago. But, this week's relief was unexpected."

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The finance minister said in his Budget speech there would be an exemption list in addition to the negative list of services for the purpose of collection of service tax.

Other exempt financial sector services include services of a sub-broker, an authorised person to a stock broker or commodities broker, banking correspondents and business facilitators for insurance companies in rural areas.

The government has also exempted services provided by the general insurance industry to some rural economy-focused schemes such as crop insurance, cattle insurance, etc.