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The bone of contention
The service tax regulations say that if you were not liable to service tax in the previous financial year, then in this financial year, you need not pay service tax on the first Rs. 10 lakhs of taxable income (income liable to service tax) and only need to pay this on taxable income beyond Rs. 10 lakhs. For subsequent years, this exemption is not available, since you were liable to service tax in the previous year.
The bone of contention is whether you were liable to service tax in the previous year (FY Apr 15 - Mar 16). Your commission income was indeed liable for service tax last year and tax was indeed paid on it - but through a reverse charge mechanism. There is really no doubt that the service you provided last year was liable for service tax - unlike in the past where your distribution service enjoyed a specific exemption from service tax.
How then can a large distributor (one who earns commission income > Rs. 10 lakhs a year) claim that he should get an exemption this year for the first Rs. 10 lakhs of taxable commission income?
You were not liable though your income was
The All India Mutual Fund Distributors Welfare Association has done a lot of work in recent months, trying to get clarity on service tax related matters. They organized a seminar on June 15th in Delhi, where noted service tax expert Bimal Jain addressed this and other service tax related issues of distributors. His opinion is that large distributors can indeed claim exemption from service tax this year, for the first Rs. 10 lakhs of commission income, even though they may have earned more than Rs. 10 lakhs last year, which was subject to service tax under the reverse charge mechanism. He relies on a proviso (proviso (ii) of Para 1 of the SSI exemption notification which effectively states that the notification will not apply to services where the service receiver is liable to pay service tax under the reverse charge mechanism.
Effectively what this means is that since the service receiver (fund house) was liable to pay service tax last year under the reverse charge mechanism, you (the distributor) were not liable to pay service tax las year. Therefore, any service tax paid by the fund house on commission they gave you last year should not be treated as your liability towards service tax. As such, you had no liability towards service tax last year. Your liability starts this year. Since you were not liable last year, you can avail SSP exemption upto the first Rs. 10 lakhs of commission income this year.
Tamanna Varma from Delhi, one of AMDwA's active members and its Senior VP, sent a specific mail to the service tax authorities to doubly confirm this understanding. Here is the text of her mail:
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Dear Ma'am,
I had visited your office and met Mr. Rastogi on Wednesday 22-06-2016.
He had asked me to send a mail to you on our business model and the clarification we wish to seek.
This is to state that, I work as a Mutual Fund Distributor and my job profile consists of selling mutual fund schemes of Asset Management Companies (AMCs) to prospective investors. As per Service Tax Rules, this has been categorised as services received by AMCs or Mutual Fund to sell it's schemes and included under positive list of services. In the last Financial Year 2015-16, the service was under reverse charge mechanism putting the liability of paying the service tax on the service receiver, I.e, AMCs or Mutual Fund. This Financial Year 2016-17, it has been brought under forward charge mechanism putting the liability on the provider.
Now, I would like to ask and get clarity from your good office on the following points regarding registration and Small Service Provider exemption procedures and provisions under the Act:
A) Can I avail the exemption provided to SSP if the aggregate value (brokerage received in lieu of selling schemes of AMCs) of taxable services provided by me was more than Rs. 10 Lacs in the last preceding Financial Year 2015-16?
Once again request you to provide the clarification on the above points at the earliest to avoid any avoidance or breach of service tax regulations.
Thanks and regards.
Tamanna Varma
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The response provided by the authorities to Tamanna can be viewed here.
What the service tax authorities have done is to reproduce a clarification which they put up on their website on 29-Feb-16, which states that small distributors will be able to avail SSP exemption (threshold upto Rs. 10 lakhs). But we already knew this. What we wanted to know was whether large distributors will be able to avail SSP exemption for the first 10 lakhs of their commission income this year. In hindsight, one could argue that Tamanna's question could be interpreted two ways and the service tax authorities chose one. Perhaps - with the benefit of hindsight - a better way to have framed this question would have been as follows:
If the aggregate value (brokerage received in lieu of selling schemes of AMCs) of taxable services provided by me was more than Rs. 10 Lacs in the last preceding Financial Year 2015-16 on which service tax was paid by the AMCs under the reverse charge mechanism, can I avail SSP exemption for the first Rs. 10 lakhs of aggregate value of taxable services in this financial year (2016-17) and pay service tax only on aggregate value of taxable services above Rs. 10 lakhs this year?
Yasir Varawala of Abacus Investments, Mumbai, and one of FIFA's leading experts on tax matters, believes that large distributors can avail SSP exemption for the first Rs. 10 lakhs of commission income this year - provided that they did not have any other sources of income last year (such as consultancy, fees etc) on which they were anyway paying service tax. His belief echoes the opinion of Bimal Jain - that the service tax liability last year on MF commissions was with fund houses and therefore distributors cannot be said to have paid service tax last year, which means this is the first year of service tax liability - and therefore the first 10 lakh exemption applies.
So, it looks like there is some relief after all, even for the larger distributors. Perhaps for distributors who earn in crores, it may mean nothing, but for someone who earns say Rs. 20 lakhs commission in a year, the saving can be substantial: which would be Rs. 150,000 out of an annual service tax liability of Rs. 300,000.
So, where's the catch?
The twist in the tale lies in the invoices that most large distributors have sent to AMCs in the Apr-June 2016 quarter. AMCs have been asking for invoices from distributors - which normally contain a break up of commission, service tax and related cess amounts. This is a normal commercial requirement which not only facilitates accurate accounting, but also enables the service receiver to claim set-offs of service tax incurred where input credit is available. Now, if your office has sent out invoices in the Apr-June 2016 quarter giving a break up of commission and service tax, and you were paid accordingly, you have already accepted a service tax liability, have collected it and have paid it onward to the Government. You have, in such a case, forfeited the exemption of the first Rs. 10 lakhs of commission income for this financial year.
If the matter on exemption is clear to you now, you perhaps don't have the luxury of claiming exemption on the next Rs. 10 lakhs of commissions during the year - the exemption is available on the first Rs. 10 lakhs of commission income. In fact, even if you have paid service tax of only say Rs. 3 lakhs for the first quarter, you perhaps don't now have the option of claiming exemption on the balance Rs. 7 lakhs - since you have already started charging service tax in your invoices, recovering it and paying it onward to the Government.
If you are a distributor who expects to receive Rs. 20 lakhs as commission income this year, you could have potentially saved service tax @ 15% on half this income - which you have perhaps inadvertently given away since you followed the due process even as you awaited clarity on the exemption.
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