Increased service tax will be applicable to the expense ratios of both regular and direct plans of mutual funds
25-May-2015 •Research Desk
I was reading about the impending service tax (on distributors) burden to be borne by investors in mutual funds. How will this affect the people invested in the direct plans of the very scheme?
- Nilanjan Sarkar
Budget 2015 brought in two changes in the service tax regime. First, the overall service tax rate was raised to 14 per cent from 12.3 per cent. This will be applicable to the management fee charged by all mutual fund schemes and will increase the expense ratios of both Regular and Direct plans of mutual funds. Secondly, distributor's commission has been brought under the service tax net. As a result, service tax which earlier used to be exempted, will now be charged for distributor's commission as well. It is not clear if this service tax will be borne by the AMC or the distributor (AMFI has directed distributors to pay it out of their own pocket). Direct plan expenses will remain unaffected by the second levy as they don't involve distributor services. Regular plan expenses may rise if the levy is ultimately passed on to investors, though there are no such indications now.