GST Impact on Mutual Fund Investment

By Registrationwala

9th June 2017

 

GST is finally a law. A law that will be, in all likelihood, implemented from July 1, there are some naysayer views about its impact on mutual funds. However, as baffling as it may sound, the new tax structure and law will certainly impact your investments.  There are certain problems in the mutual fund industry in India and the way things have panned in the past few years or so, there seems to be no respite from complexities.

Rampant competition coupled with cost escalations have led to a situation where some of the mutual fund houses are finding it difficult to sustain and are at the brink of getting shut; some already have shuttered down. Also the socio-economic factors and lack of awareness means that the Indians do not invest enough in mutual fund. In fact, only of late there have been some catchy ads on TV to grab the attention of the consumer. However, the disclaimer line, which warns the consumers of different conditions applied, acts as a deterrent. Assets Under Management (AUM) of the mutual fund industry have seen a substantial growth in the past few years but since the market is truly big, mutual funds are not that an attractive option for the populace.

As if the miseries were not enough, the implementation of GST will only add to existing woes. Once GST is implemented, investing in mutual funds will become costlier than ever. The primary reason for this cost escalation is the fact that the houses will have to shell more for maintaining the compliance. However, the only respite can come in form of some government support that does seem to be happening anytime soon.

Some of the big names in India have united to raise the voice of the common. The Association Industry players have come together to fight their own case. AMFI and Price water house Coopers have spoken about the concerns and given some inputs to GST commissioner as well.

Currently all the security transactions are kept away from VAT and Service Tax. However, once the GST is implemented, the practice would require giving taxes. The industry is not very pleased with this move as it is seen as a step that would put the development of the fund industry off track.

GST keeps things simple. Under this management, the tax incidence arises at the location where the service gets delivered. Also the law would consider the head office of the Asset Management Company and its various branches as separate entities. However, for those of you a little aware about the functioning of the fund industry this is no brainer that it operates a little differently. It is always centrally operated while marketing of the scheme happens at the different branches and levels.

And this is where the problem is rooted. Once you consider the branches and head office as separate entities, it leads to shooting up of the final price of the service. Because there will be a tax levied on the transaction between the head office and the branches, it will only lead to complications.

AMFI has come up with certain suggestions to remedy these issues. It has advised the GST regime to centralize the registration of AMCs for taxationand then include the particulars of business happening anywhere else. It has also sought to bring into the attention of regime the crushing burden of the compliance norms that mutual fund houses have to bear.

Certain quarters have expected that the investment in mutual funds might get costlier by 300 basis points or 3 per cent.

As the service tax burden would go up for sure, consumers may end up spending more. However, there is no indication on the final percentage that will be levied on the Mutual Fund services, experts say that the bracket will be between 18-22 percent. These days the service tax levied on Mutual Funds in 15 percent; on the other hand, once the GST is implemented, it may go up to 18 per cent. Thus the implementation of GST will take unsavoury and unfavourable turns for the mutual fund sector with the investors shelling out more for the services.

Such is the impact of GST that it will not leave any corner untouched. Almost all the stakeholders, frominvestors to distributors to manufacturers, every player will be affected.There will be higher management fees for investors; it is likely to go up from 15 to 18 per cent. Asset Management Companies (AMCs) will surely have to compensate investors on liquid kind of products, especially where fee charged are inflexible, and to distributors who will definitely coax the manufacturers to shoulder the burden with them.

The service sector is anyway expected to bear a lot of burden once the GST is implemented. It won’t subsume taxes but only add three percent of additional tax. While there seems to be a lot of dark cloud over the development of the funds industry once GST is implemented, all is not lost yet. Things are not exactly hunky dory but can certainly be brighter what it is perceived at the moment. The expense ratio is the most important factor before investing in mutual funds but that is not the only consideration. While selecting funds for investment any smart investor would think long term and keep the impact of GST aside and focus on fundamental characteristics of the fund he is investing in. There might be some cheaply available funds to mitigate the effects of GST but in the longer run they might not fetch as much benefit as a slightly more expensive fund would do. Now that the economy and finance sector is expected to undergo a major overhauling, the best idea would be to wait and watch before consulting an advisor on the issue. Jumping in the river without knowing the depth has never been a good idea. After all, Mutual Funds investments are subject to market risk, please read the offer document clearly before investing.

 

GST Impact on Mutual Fund Investment

2017-06-09