MF industry wants service tax to be borne by consumers

The mutual fund industry wants the consumers to bear the burden of 12 percent service tax on purchase of schemes and has also pitched for higher administrative expenses during their meeting with the Finance Ministry officials.

"Service tax should be borne by consumers and should be kept out of the total expense ratio," Association of Mutual Funds of India (AMFI) CEO H N Sinor said.

The mutual fund industry has demanded an increase in the expense ratio, which is mainly administrative expenditure, to 2.25 percent from 2.20 percent - of which 2 percent is administrative expense and 0.20 percent exit load.

"The meeting was called to discuss how to increase retail participation. We have asked them to increase the total expense ratio to 225 basis points and also allow them to credit the exit load directly to the schemes of the asset management companies so that the MFs do not have to pay it," Sinor said.

On the issue of re-introduction of commission for brokers, also known as entry load, he said, "we have not raised entry load issue. Only distributors mentioned it. It is a 3-year old matter and the MF industry did not believe in reviving the issue."

The entry load of 2.25 percent which was paid as commission to distributors of mutual funds, was banned in 2009 by the then SEBI chief C B Bhave, who felt that investors were being taken for a ride by distributors who encouraged investors to churn their portfolios. The ban, however, led to drying up of inflows into mutual funds.

The finance ministry, the officials said, is taking note of the short and medium term issues being faced by the industry in addition to their concerns on tax related matters. "There are issues of short term and taxation nature. Those are to be fast tracked. We need to work out a balance so that the industry grows," DEA Secretary R Gopalan said.

The meeting comes close on the heels of Prime Minister Manmohan Singh's statement last week that mutual fund industry was in problems and something was needed to be done to resolve their issues.

The issues like allowing mutual funds to float pension schemes, provision of tax relief on such products at par with other life insurance schemes and more benefits for those players who wish to provide services in smaller towns were also discussed during the meeting.