Circular No. 94/5/2007-Service Tax

F. No. 137/158/2006-CX.4

Government of India

Ministry of Finance

Department of Revenue

(Central Board of Excise and Customs)

New Delhi, the 15th May, 2007

Subject:-       Applicability of service tax on entry and exit load charged by the Mutual Fund – reg.

Service tax is leviable on ‘asset management and all other forms of fund management’ under the category of ‘banking and other financial service’. In this context a question has arisen as to whether the service tax would be chargeable on the ‘entry and exit load’ amount charged by a mutual fund to the investor.

2. The issue has been examined by the Board.  ‘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).

3. 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.

4. 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.

5. 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 & other financial services.

6. Trade and field formations may be advised accordingly.

7. Hindi version will follow.

(Gautam Bhattacharya)

Commissioner (Service Tax)

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Category : Service Tax (3355)
Type : Circulars (7740) Notifications/Circulars (31742)

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