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India’s top 2,500 distributors paid Rs. 2,200 crore in GST during the last financial year. GST compliance is essential for MFDs to continue their distribution services.
In order to help MFDs understand the GST compliance process and address their frequently asked queries, Nishant Patnaik, Associate Editor, Cafemutual explained all about GST compliance for MFDs at the recently concluded CIF 2025.
Minimum threshold for GST and exemption regulations
MFDs are required to pay GST as they use the services offered by AMCs to create their offerings. MFDs from all states except Tripura, Nagaland, Mizoram and Manipur receive an exemption for income up to Rs. 20 lakh. MFDs from these four states receive an exemption on GST up to an income of Rs. 10 lakh.
This exemption can be claimed by individual MFDs, sole proprietorship, partnership firm, limited liability partnership, private limited and public limited entities in distribution.
MFDs who integrate their website with a payment gateway cannot claim this exemption. However, MFDs who have integrated the API of NSE,BSE or MF Utility are eligible for the exemption. Overseas and NRI distributors are also excluded from claiming this exemption.
What should MFDs do once their income crosses the minimum threshold?
MFDs must get a GST licence within one month after crossing the income threshold. In the first year of payment, GST is required to be paid only on the income over the minimum threshold while from second year onwards, MFDs are required to pay GST on their entire income.
To arrive at the total gross income, MFDs must include income across products like mutual funds, insurance, PMS/AIFs.
While some products offer gross commission, PMS/AIF offers net commission to MFDs. If an MFD gives his GST registration, the PMS/AIF companies will give you 18% more, which is over and above commission. Insurance falls under reverse charge mechanism and hence, distributors receive commission net of GST.
While MFDs need to factor in income earned from insurance to arrive at the total income, they are not required to pay GST again on the insurance income.
In case an MFD’s income falls below the threshold in a financial year, they are required to pay GST for the year but can cancel their GST licence for the next financial year citing lower income. Such distributors can reapply for a GST licence once their income crosses the threshold again. Distributors can cancel and reapply for GST licence as many times as needed.
GST composition scheme
Existing Maharashtra MFDs can also take benefit of the composition scheme during the last quarter of the financial year (Jan – Mar). However, MFDs opting for GST for the first time can take the benefits of GST composition scheme since beginning irrespective of the scheme window.
This scheme offers benefits like less compliance requirements where only 1 return can be filled during the entire financial year with quarterly payment. GST rate for MFDs in this scheme is 6%, lower than 18% for other MFDs.
However, MFDs under composition scheme cannot claim input credit and become ineligible to get additional 18% tax from PMS/AIF providers. In fact, such MFDs are required to pay 6% GST on their PMS/AIF income.
GST compliance process
MFDs can raise their GST invoice using their service code 997152. MFDs can use external help like from RTAs to raise the invoice but it is advisable to raise the invoice on your own to be more aware of the compliance process. The GST invoice requires details like name, address, principle place of business, GST number of the distributor and the AMC, GST name of the MFD and the AMC, place of supply, details of various tax components like IGST and SGST and signature in case of a physical invoice.
MFDs are also required to maintain a book of accounts with details of commission, expenses, bank accounts. Distributors will have to maintain this book of accounts in an electronic form with required backup at their principal place of business. These records have to be maintained for a period of 6 years in a machine readable format.
MFDs should consider appointing a compliance officer to take care of all their GST compliance to maintain their focus on growing their business.
Distributors who are not using the composition scheme are required to file 24 GST returns (twice a month before 11th and 20th of every month). Late payment can result in penalty.
Penalty
In case of non-compliance, the GST commissioner can levy a penalty on MFDs according to section 73 and 74 of the GST regulations. While section 73 is tax not paid due to lack of awareness, section 74 is wilful default.
Input tax credit
Regular tax payers can take benefit of input tax credits on non-cash transactions. Tax credit can be taken on expenses like internet bill, utility bills and official expenses by offering relevant invoices.
It can also be taken on services where MFDs are recipients like legal consultation fees.
Further, MFDs can also claim input credits in CA fees, expenses incurred to attend relevant events for knowledge gathering, travel, purchase of mobile phone/laptop or other electronics gadgets for office use.
Dealing with GST non-compliance notices
In the event of receiving a non-compliance notice from GST authorities, MFDs should pay at least 10% of the tax component (besides interest and penalty) right away to become eligible to make an appeal against the notice.
MFDs can then file a case in the appellate within three months of receipt of the notice with an additional grace period of one month.
Distributors can then present relevant documents to the GST commissioner during their hearing. They can request the GST commissioner to waive off the interest and penalty amount if the non-compliance has been made due to lack of awareness.
You can watch the complete session here
