Sebi’s MF ruling may lead to service tax loss !

Mutual funds

Sebi’s decision to abolish entry loads in all mutual fund (MF) schemes can have certain implications as discussed below :

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While there could be huge slippages of service tax paid by the fund industry, it could also lead to proliferation of bogus independent financial advisors (IFAs) without proper certification, and in turn mis-selling of MF schemes, industry officials said.

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They also believe that in the long run, the decision could lead to cartelisation in the MF industry with just a handful of large funds houses and distributors ruling the market.

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Currently, when an investor opts for a scheme, the fund house directly deducts service tax from the commission it pays to the distributor or IFA.
In turn, the fund house deposits this with the government.

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But very soon, fund houses will not have anything to do with the service tax over distribution commission, since under the new structure, investors will pay the commission directly to the distributor/IFA.
So the onus of paying service tax will now be on the distributor/IFA.

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Chances are that there will be substantial leakage of revenue for government through under-reporting or non-reporting of advisory commission,’’ said a top fund industry official at an AMC.

Industry estimates that in the last financial year total service tax paid by the fund houses was about Rs 160 crore. ‘‘A large chunk of this could remain with advisors now’’ the official pointed out.

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Another fallout of the changed fee structure could be proliferation of advisors without proper training and registration in the fund industry.

After this ruling and change, anyone can become an advisor and charge the investor for advice,’’ a top official at a local fund house said.

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Another fallout could be squeezing out of AMCs and distributors with limited financial resources and growth of larger players.
In the changed scenario of no entry load, AMCs will have lesser funds at their disposal for marketing and business expansion.

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The fund industry is on way to suggests a way to get out of this situation.

Stay tuned ! 🙂

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