Implications of budgetary changes on activities undertaken by mutual fund agents

Implications of Budgetary changes on activities undertaken by Mutual Fund agents.

With the advent of Negative list of services from July 2012, specific classification of services has been dealt away with and a single unified definition of services has been specified under Section 65B(44) of the Finance Act, 1994. (the Act)

Provisions of Section 65B(44) of the Act specify as under

“service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—

(a) an activity which constitutes merely,—

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

(iii) (a) transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time being in force.

Basis above provisions, any activity under taken for a consideration amounts to rendition of service with the exception of the excluded category specified in the said definition.

Mutual fund agents or distributor provide services relating to distribution or marketing of such funds to the fund management company and the buyers. They charge consideration in the form of brokerage/commission for such services rendered by them to such fund management companies or buyers. Activity undertaken by the Mutual Fund agents therefore gets covered under the definition of the term “services”

Provisions relating to Taxability of services are provided under Section 66B of the Act, for ease of reference the same is reproduced below

Section 66B

There shall be levied a tax hereinafter referred to as the service tax at the rate of fourteen per cent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

Basis above provision, taxability of service would depend upon the following factors

• such services are not be covered under the negative list

• such services are rendered in the taxable territory

• such services are provided by one person to another

• value of such services rendered is collected in the manner prescribed

The activities of a mutual fund agent satisfies all the above criteria and therefore service tax is  attracted on the same. However, taxability would not arise if the said service is specifically exempted by the Government by way of notification issued under Section 93 of the Act

Provisions Applicable for period upto 31.3.2015

Under Notification 25/2012 S.T dated 20.6.2012 as amended (Mega exemption) the Central Government provided exemption to services provided by the

a. Mutual fund agent to a mutual fund or asset management company under serial no. 29(c) of the Notification and

b. Distributor to a Mutual fund or asset management company under serial no. 29(d) of the Notification.

Provisions applicable for the period upto 31.3.2016

Vide Notification 6/2015 ST dated 1.3.2015 the above exemption provided to services of Mutual fund agents was withdrawn and accordingly the same was made taxable w.e.f 1.4.2015.

Person liable to pay service tax

Provisions of Section 68(2) of the Act provides as under

Notwithstanding anything contained in sub-section (1), in respect of such taxable services as may be notified] by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.

Basis above provision the Government can notify person liable to pay service tax and the extent of liability in respect of specified services.

Rule 2(1)(EEA) of the Service Tax Rules, 1994 (the Rule) notifies the recipient of such services as the person liable to pay services tax in relation to such services provided by the Mutual Fund agent (the Mutual fund company or the Fund management company)

Further specific insertion was also made under Notification 30/2012 ST dated 20.6.2012 as amended to specify Mutual fund company or the Fund management company as the person liable to pay service tax on 100% value of services rendered by the Mutual fund agent.

Provisions applicable for the period from 1.4.2016 Union Budget 2016 further amended the Service tax Rules and accordingly clause (EEA) of Rule 2(1) of the Rules was omitted vide Notification 19/2016 ST dated 1.3.2016.

Basis above omission, onus of discharging service tax liability is again shifted from the service recipient to the service provider and accordingly the Mutual Fund agent becomes the person liable to pay service tax on such services rendered.

Vide Notification 18/2016 ST dated 1.3.2016 Similar omission is also carried out in Notification 30/2012 and accordingly the service provider (Mutual Fund agent) is liable to pay service tax on 100% value of services rendered by them.

Point of taxation

Consequent to shifting the liability of discharging service tax from the service provider to service recipient, Point of taxation will be determined under Rule 3 of the Point of Taxation rules, 2011.

Basis Rule 3 of the Point of taxation Rules, 2011 point of taxation with respect to services provided on or after 1.4.2016 would be

• time when invoice for services provided is issued
• date of completion of service where invoice is not issued within the period specified under        Rule 4A of the Rules (thirty days from the date of completion of services or receipt of any value of such services whichever is earlier)
• date of receipt of any advance where any advance is received prior to completion of service.

With respect to services provided prior to 1.4.2016 and where payment is also made by the service recipient prior to 1.4.2016 point of taxation would be determined by Rule 7 of the Point of Taxation Rules, 2011 and accordingly point of taxation would be date of such payment by the service recipient.

However, cases where service has been provided prior to 1.4.2016 and payment is made after 1.4.2016 is not explicitly covered under the Point of Taxation Rules, 2011. On a careful reading of the Provisions it is felt that Rule 7 would apply to such cases and tax liability would rest on the Service recipient considering the third proviso to Rule 7 of the Point of Taxation Rules, 2011. Authorities may however dispute on the grounds that such situations are also covered under Rule 3 of the Point of Taxation Rules, 2011 and accordingly liability to pay tax would rest on the Service Provider.

Further in terms of Notification 33/2012 ST dated 20.6.2012 Small service provider exemption would be available to service providers having turnover of rupees ten lakhs in preceding financial year (excluding exempted and export turnover) and accordingly exemption from payment of service tax on value of services provided upto rupees ten lakhs would be available in the current year.

The author can also be reached at nilesh@optitaxsconsulting.com or canilesh14@gmail.com