GST Impact on Mutual Funds in India on Redemption & Sale

7 Mins

What is GST (Goods and Service Tax) in India?

GST is an indirect tax which is rolled out by the government in India with effect from 1st July 2017. GST in the State of Jammu and Kashmir with its own legislature came into force with effect from 8th July 2017. The introduction of GST is a very significant step in India. GST amalgamates a large number of Central and State taxes into a single tax. It will mitigate cascading or double taxation in a major way and pave the way for a common national market.

GST is charged on value additions, or the monetary value added at each level. A product made in site A and sold in location B will generate tax receipts for location B because GST is also a destination-based tax.

GST Impact on Mutual Funds

India will be transformed into a standardized national market. The key question is whether India’s new Goods and Services Tax (GST) will have a significant impact on investment. It goes without saying that a massive execution of this will affect your investment costs and investment strategy.

The various ways in which the GST law will impact the mutual funds industry in India are as follows:-

Distributors

Mutual fund distributors whose annual commission earnings are less than INR 20 lakhs are exempted from registration.
Before GST implementation, credit on service tax on distributor services received by AMC was not available on the grounds that the service is received by Mutual Fund Company (MF) and not Asset Management Company (AMC). Under GST, this credit will be available under the seamless tax credit regime.
Before GST implementation, distributors were not able to claim credit/ refund on service tax paid on their expenses. Under the GST regime, credit/refund will be available. Even if the reverse charge mechanism also prevails under the GST regime then also the refund will be available to the distributors thereby reducing the overall cost of distribution.
Another issue with respect to the documentation perspective is that the distributors do not raise invoices to mutual funds before. Central processing units (CAMs) make payments to distributors. Under GST, no credit will be available if the invoices are not raised. If there are no invoices which are actually raised by the distributors and CAMs then the distribution of the credit to the Mutual fund will be a major concern.

AMCs

Under GST, the rate of tax has increased to 18% from 15% in service tax. This makes the mutual fund industry a little more expensive. This will be an additional cost to Mutual Fund companies and could be passed on to investors. The service tax was set at a uniform rate of 18%. The distributors’ tax obligations will increase by 3% as a result of this. Distributors who make less than Rs. 20 lakh annually must register for GST in order to avail of tax exemption.
Before GST implementation, service tax (ST) and value-added tax do not apply to transactions involving securities. The introduction of GST will alter this situation and make the sale of securities taxable. So, there is an additional tax on trading in securities besides Securities transaction tax (STT). This will enhance the mutual fund cost.
Investors are paying higher premiums to invest in mutual funds after the implementation of GST. Gradually, the expense ratio for the majority of the schemes and plans offered by mutual fund firms would rise. Mutual fund houses not only offer fund management services but also make use of third-party services. For instance, they work with custodians and brokerage firms. As a result, the expenditure ratio of any plan the investor chooses will increase.

Others

With GST, seeking advice from a professional investment planner, investment advisor or financial guardian has become more expensive.

GST Impact on Equity Mutual Funds

There are numerous expenses that are deducted from your account when you buy and sell stocks. Such costs include security transaction tax (STT), state-level stamp duty, SEBI fees, turnover tax, and service tax in addition to the brokerage fee. The brokerage’s service tax in the past was computed at 15% of the amount paid (14% service tax plus 0.5 percent Swachh Bharat Cess and 0.5 percent Krishi Kalyan Cess). The service tax has been merged into the overall GST, changing the GST rate on financial services from 15% to 18%.

As a result, the final cost due to summing up the service taxes has been included in GST. This will therefore be approximately 0.03% or 3 basis points on a 1% round brokerage. Considering the aggregate shift which is 3 basis points approximately, this might not seem like a big deal to long-term investors. The economics of churning their funds in the equity markets will change for short-term traders, though, as a result of the additional 3 basis points in cost.

GST Impact on Mutual Funds Across Sectors

The introduction of GST has led to temporary issues for different industries. In the long run, the effects of GST are anticipated to be favourable. These items are potentially the most profitable sectors or industries influenced by GST. These industries also have sector-specific mutual funds which invest heavily.

A few of the sectors are discussed below:

Automobile and Transportation

There were a number of taxes that were applicable under the earlier tax system, including VAT, sales tax, property tax, fuel tax, and registration etc. With the implementation of GST, the tax burden is decreased for the end users. The importers and dealers can now submit a GST claim for the taxes paid for purchases of imported or sold items that were previously not possible. GST impact also aids in purchasing auto parts from manufacturers at increased quality resulting in lower costs in operating a supply chain.

Find – What are auto sector mutual funds?

Logistics

This sector comprises the warehousing industry, transportation industry, storage and outside logistics. Initially, there were many challenges in the logistics sector like ineffective networks, high coordination costs, inefficient supply chain, inadequate infrastructure, etc. Also, there were large amounts of taxes involved in it which made the logistics expensive and cumbersome. GST has subsumed the multiple VATs and helped the firms to redesign supply chains and take advantage of economies of scale. In this way, GST impact aids in simplifying the transition to the process of international trade.

Fast Moving Consumer Goods (FMCG)

The fourth largest sector in the Indian economy is the FMCG sector. GST helps the FMCG industry by modifying tax rates and lowering the cost of distribution. Some businesses have gained whereas some have lost as a result of modifications to the tax system.

Learn – What are FMCG Sector Fund?

Consumer Durables

Currently, consumer durables are subject to 28% GST, which is a little more than the prior taxation system. Market experts do not have any significant effects on the margins of consumer goods manufacturers following a change in the taxation system.

Real Estate

The GST rate for projects that are still being built stays at 12% alone. GST’s effects on the real estate industry are cost-constrained and the input tax credit is also available.

Learn: What is REIT?

Airlines

With the implementation of GST, travelling on the business class airline has become expensive as the tax rates have been increased from 9% to 12%. However, the economic class has benefited as the rates have been reduced by 1% to 5%. Aviation fuel is not monitored by GST so the indirect taxes should be paid on the same. The input tax credit is available only for economy class.

Conclusion

While GST has been beneficial for some sectors and industries due to decrease in tax rates, others are incurring higher costs. Due to the increase in the overall cost of doing business and distribution of mutual funds.

With the imposition of GST, there seems to be a slight negative impact on the mutual fund sector. Although the impact is not that huge, it definitely changes situations to a certain extent when it comes to mutual fund investments. Therefore, it can be seen that the overall impact is positive as per the long-term perspective.