On Friday, the government has finalized Goods and Services Tax (GST) structure in which it has kept standard rates of 18% for the financial services industry. This indicates that the government has hiked the service tax liability of distributors by 3% i.e. from 15% to 18%.
However, there is a good news for the distributors in the fine print of the new tax rules. The government has exempted distributors earning up to Rs.20 lakh from paying service tax, say tax consultants. Currently, distributors earning up to Rs.10 lakh as commission are exempted from paying service tax.
Another key implication of the new tax rules is input credit benefit. Distributors earning over Rs.20 lakh a year from commission stand to gain from this move, as they will be allowed to set off GST against other services. Tax experts say that distributors will have to take GST registration to avail this benefit and use this certificate to set it off against the service tax paid by them to other service providers. This way, distributors will get relief to the extent of service tax paid by them to their vendors.
The government will implement GST from July 1, 2017.
However, a key question that the new tax regime raises is regarding the requirement of state specific registration and compliance. The GST Bill says that the service tax has to be paid at a place where it has been consumed. AMCs, insurers and distributors have investors spread across the country. That means both companies and distributors will have to register themselves with the service tax department of the respective states. This tax can be paid online but auditing and compliance need to be done at the source state.
Tax experts are divided on this issue. Divyesh Lapsiwala, Tax Partner, EY India believes that distributors having clientele from other location will have to take multiple GST registration.
While a Mumbai-based tax consultant, ZM Kapasi has a different view on this. He feels that only AMCs will have to take multiple registration as distributors ultimately sell their products.
Kapasi, however, doubts if distributors can avail exemption benefit of Rs.20 lakh if they have business from multiple locations. “There is a grey area in the current GST Bill. According to the law, one cannot avail exemption limit of Rs.20 lakh if they have presence in multiple locations. That means, if a distributor based out of Mumbai sells scheme of Chennai-based fund house, they may not get the benefits of exemption. I think AMFI should seek clarity on this from the ministry.”
For investors, the mutual fund schemes will get costlier since fund houses charge service tax on management fee. For instance, if the total expense ratio (TER) is 2.50% and the scheme is charging 1% management fee, the tax would be only on 1% fee.
Not only TER will go up, it would affect NAV too. Every time a fund manager executes trade, the fund will have to pay service tax on brokerages. Simply put, it will raise costs marginally. “This is a hidden cost that can increase the cost of investment in mutual funds. In addition, it would affect schemes having high turnover ratio,” says Jimmy Patel, CEO, Quantum MF.
A Balasubramanian, AMFI Chairman and CEO, Birla Sun Life MF believes that the input credit will help AMCs to limit TER. “The government has allowed fund houses to avail input credits on the services tax paid by the AMC to other service providers. It would have marginal impact on TER. AMCs can pass on these benefits to investors.”
