Mutual fund industry body Association of Mutual Funds in India (Amfi) has appointed consultancy PwC to prepare a white paper on the implementation of the goods and services tax (GST) and its impact on the mutual fund sector. PwC is expected to finalise the draft this week which will then be forwarded to the Securities and Exchange Board of India (Sebi).
Under the GST regime, asset management companies (AMCs) will have to pay a service tax of 18 per cent on the investment management fees that they earn. Until now, the tax rate was 15 per cent. This might lead to an additional tax outgo of Rs 300-500 crore annually, assuming sector revenues of Rs 10,000-15,000 crore. Since the service tax is ultimately borne by investors, their expenses will go up marginally.
Management fees are a part of the total expense ratio charged annually by AMCs, and include costs such as marketing and selling expenses, fees paid towards registrar and transfer agents, trustees, auditors, etc. Typically, equity funds charge management fees of 1-1.5 per cent of the assets under management, while debt funds charge between 0.05 per cent and 0.5 per cent.
The GST Bill says the service tax is to be paid at a place where it has been consumed. This has led to confusion among fund houses as well as distributors which provide services across the country.
“AMCs will have to do a detailed revenue and cost allocation for each of their branches and give the inputs to the individual states,” said a fund house CEO, on condition of anonymity. “AMCs and distributors need clarity on whether the GST needs to be paid state-wise or in a consolidated manner.”
AMCs will directly deduct the 18 per cent service tax from distributors that do not take a GST registration, under the reverse charge mechanism. Those taking a GST registration will come under the forward charge mechanism, whereby the tax will have to be paid by the distributor directly.
“Under existing laws, distributors earning less than Rs 10 lakh annually do not need to pay any service tax or register separately. However, post GST implementation, these distributors will have to register under GST and later claim exemption,” said Manoj Nagpal, CEO, Outlook Asia Capital.
However, it is not yet clear if distributors earning less than Rs 20 lakh and catering to investors in different states can claim any exemption under the GST regime.
“Distributors working on a commission model may not have to register separately in each state. However, registered investment advisors working on a fee model and catering to investors in different states may have to register separately in different states leading to higher compliance costs,” said Nagpal.