TAXABILITY OF MUTUAL FUND LOADS

[Dr. Sanjiv Agarwal]

Mutual funds charge loads- both, entry load and exit load on mutual fund transactions from the investors. A doubt exists as to whether such loads shall be liable to service tax

A clarification issued by CBEC comes to our rescue. CBEC has vide Circular No. 94/05/2007-ST dated 15.5.2007 clarified that entry loads and exit loads charged by mutual funds from investors shall not be liable for payment of service tax under fund management services (banking and financial services) but the 'investment and advisory fee' charged by asset management companies (AMC) to the mutual fund is chargeable to service tax. While clarifying, CBEC has stated as follows —

"Mutual Fund statutorily means a fund established in the form of a trust to raise money through sale of units to the public for investing in securities including money market instrument. Thus, a mutual fund is a collective pool of money created by subscription of its units by the investors. The objective of a mutual fund is to achieve financial goal of maximizing the return for subscribers, by investing the money efficiently and effectively in the securities and other such instruments using the service of a professional fund manager, i.e., an asset management company (AMC).

In operating the scheme, the following expenses are incurred by the mutual fund,—

(i) Initial issue expenses: These expenses are incurred on initial brochures, SEBI approvals, advertisement, registrars, preparation of certificate, postage, distribution and broker, etc.

(ii) The recurring expenses: These expenses are incurred on fund management fee to Asset Management Company, brokerage, trustees fee, expenses on account of stationery, postages, advertisements, listing on exchanges, publishing of Net Asset Value (NAV), distribution charges, custodian charges, audit fee, etc.

In terms of the Tenth Schedule to the SEBI (Mutual Fund) Regulation, 1996, the initial issue expenses are amortized over a period of the scheme, and the entry and exit load charges are paid by the investors to the fund to meet these expenses. Any unamortized portion of expenses is included in calculation of NAV. Hence, entry and exit load charges are not towards fund management service provided by the AMC but to meet the initial issue expense and other specified expenses, incurred by the mutual fund. It is accordingly clarified that "entry and exit load" charged by mutual fund would not attract service tax levy under the category of fund management service.

In a mutual fund, fund management activity is undertaken by an asset management company (AMC) right from the stage of inception of mutual fund. For its services of fund/asset management, (i.e., a periodic/recurring fee) an AMC charges the mutual fund an 'investment and advisory fee', in accordance with provisions contained in the SEBI regulation. This fee is chargeable to service tax under 'fund management service'. Similarly, service provided by the distributors/selling agents, brokers, custodians, trustees etc., to the fund, is also taxable under respective taxable service such as business auxiliary service, stock broking service and banking and other financial services."

Master Circular No. 96/2007, dated 23-8-2007 has further clarified on this issue. CBEC has clarified as follows vide para 34 of Master Circular 96/2007 dated 23.8.2007 -

'Asset management and all other forms of fund management' are liable to service tax under 'banking and other financial service' [section 65(12)].

Whether the amount charged as 'entry and exit load' from the investor by a mutual fund is liable to service tax as asset/fund management services under banking and other financial services [section 65(105)(zm)]?

Entry load and exit load charged by a mutual fund are not for the purpose of management of assets. Thus, amount charged as "entry and exit load" are not to be treated as consideration received by an Asset Management Company for asset management and hence not liable to service tax under Banking and other Financial service [section 65(105)(zm)].