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Effect of GST on Mutual Funds

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Rohan Agarwal
Rohan Agarwal

General knowledge on GST to understand the biggest tax reform in the Indian Economy. Note: It's just a brief on GST and does not get into the intricacies. Thank you for viewing.

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Effect of GST on Mutual Funds
What is Tax ? A compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions. Two types of taxes: 1) Direct Taxes: Taxes that are directly paid to the government by the taxpayer. It is a tax applied on individuals and organizations directly by the government e.g. income tax, corporation tax, wealth tax etc. 2)Indirect Taxes: Taxes applied on the manufacture or sale of goods and services. These are initially paid to the government by an intermediary, who then adds the amount of the tax paid to the value of the goods/services and passes on the total amount to the end user e.g. sales tax, service tax, excise duty etc.
Cascading Effect (Tax on Tax) Complexity in determining the nature of transaction Sale vs Service Lack of uniformity in provision and rates Fixation of situs Local Sale vs Central Sale
Goods and Services Tax (GST) is an indirect tax reform which aims to remove tax barriers between states and create a single market. A tax trigger aimed to replace the current complex structure of multiple indirect taxes in favour of a comprehensive dual Goods and Services Tax (GST). With clear road map being laid down by the Finance Ministry, the Government seems on course to fast track the entire process to achieve targeted GST implementation effective 1 July 2017.
Effect of GST on Mutual Funds
Removal of cascading effect on taxes Free movement of goods and services Rationalize structure of indirect taxation Continuous chain of set off till the consumer Wider coverage of Input Tax and Service Tax set-off Destination principle The GST structure would follow the destination principle. Accordingly, imports would be subject to GST, while exports would be zero-rated. In the case of inter-State transactions within India, the State tax would apply in the State of destination as opposed to that of origin.
TYPES OF GST CGST SGST IGST Intra-State Inter-State
CGST Excise duty Service Tax SAD SurchargesCess CVD Medicinal excise
SGST State cess & surcharges Entertainment tax Luxury Tax VAT/ Sales tax Entry tax/ Octroi/LBT Purchases Tax Taxes on Lottery & Gambling
TAX RATE Coverage Tax exempt 0% tax rate Commodities such as food grains, rice and wheat are included. First slab 5% tax rate Under which common-use items such as spices, tea and mustard oil will taxed at 5% Second slab 12% tax rate Under this slab, processed food items have been included. Third slab 18% tax rate Under this slab, items such as soaps, oil, toothpaste, refrigerator and smart phones have been included. Fourth slab 28% tax rate There are two tiers under this fourth slab:- White goods and cars will be taxed at 28% tax rate. 28% tax rate plus cess will be charged for sin products such as luxury cars, tobacco products, pan masala, and aerated drinks. Cess will be levied on top of the higher tax rate.
7% 14% 17% 43% 19% COMPOSITION OF GOODS UNDER TAXATION No tax, 0% 5% 12% 18% 28%
Effect of GST on Mutual Funds
GST Business process Supply Chain HR Sales & Marketing Cash flows Accounting Fiscal Policies IT Systems
Effect of GST on Mutual Funds
Effect of GST on Mutual Funds
1) Securities transactions will become expensive: At present, the transactions on securities are excluded from the purview of Value Added Tax (VAT) and Service Tax. The GST regime is likely to change this practice and the delivery of securities would attract tax. 2) Compliance burden of mutual funds will go up substantially: As per the model of GST code, a tax incidence arises at the location where a service is being delivered. Besides this, the model law considers the head office of the Asset Management Company (AMC) and its branches different entities. The asset management activity of a fund house is usually centrally operated, while marketing and sales activities of the schemes run at various places. The problem arises when branches and the head office are treated as different entities. It is also unwise to treat transactions between the head office and the branches as "supply" of services.
3) Investors will suffer once the GST is implemented: Don't be surprised if mutual fund houses subsequently raise the expense ratios under most of their schemes. We not only provide fund management services, but in this effort, we utilise services of other entities such as custodians and brokerage houses. As a result, the expense ratio of the scheme investors have invested in includes the Service tax that the Asset Management Companies (AMCs) pay. 4) Mutual fund advice will also cost investors more: GST will also negatively affect distributors: If investors opt for arbitrary recommendations from mutual fund distributors who earn commissions from mutual fund houses, it could possibly hurt this category of financial professionals. 5) Impact on distribution levels: The government has exempted distributors' annual earning up to Rs. 20 lakh from paying service tax. Currently, distributors earning up to Rs. 10 lakh as a commission are exempted from paying service tax
Effect of GST on Mutual Funds
GST has been envisaged as a more efficient tax system, neutral in its application and attractive in distribution. The advantages of GST are: Wider tax base, necessary for lowering the tax rates and eliminating classification disputes Elimination of multiplicity of taxes and their cascading effects Rationalization of tax structure and simplification of compliance procedures Harmonization of centre and State tax administrations, which would reduce duplication and compliance costs Automation of compliance procedures to reduce errors and increase efficiency
High Tax burden for manufacturing SMEs Increasing operating costs Change in Business software GST will be implemented in the middle of the year Increase in Taxes will increase the price Petroleum products are not a part of GST yet Registration in multiple states Problems Faced by E-commerce Composition scheme is available for many Businesses No Anti-Inflationary Measures
Change is definitely never easy. It is important to take a leaf from global economies that implemented GST and overcame the teething troubles to experience the advantages of having a unified tax system, easy input credits, and reduced compliances. Once GST is implemented, most of the current challenges of this move will be a story of the past. India will become a single market where goods can move freely and there will lesser compliances to deal with for businesses. Twenty four states have passed the state GST (SGST) Act till June 5, while seven states, including Meghalaya, Punjab, Tamil Nadu, Kerala, Karnataka, Jammu & Kashmir and West Bengal are yet to pass the SGST Act . The Centre has said it will roll out the Goods and Services Tax (GST) on July 1 and it is crucial for all states to approve the SGST Act for smooth implementation of the tax reform measure.
Effect of GST on Mutual Funds

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Effect of GST on Mutual Funds

  • 2. What is Tax ? A compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions. Two types of taxes: 1) Direct Taxes: Taxes that are directly paid to the government by the taxpayer. It is a tax applied on individuals and organizations directly by the government e.g. income tax, corporation tax, wealth tax etc. 2)Indirect Taxes: Taxes applied on the manufacture or sale of goods and services. These are initially paid to the government by an intermediary, who then adds the amount of the tax paid to the value of the goods/services and passes on the total amount to the end user e.g. sales tax, service tax, excise duty etc.
  • 3. Cascading Effect (Tax on Tax) Complexity in determining the nature of transaction Sale vs Service Lack of uniformity in provision and rates Fixation of situs Local Sale vs Central Sale
  • 4. Goods and Services Tax (GST) is an indirect tax reform which aims to remove tax barriers between states and create a single market. A tax trigger aimed to replace the current complex structure of multiple indirect taxes in favour of a comprehensive dual Goods and Services Tax (GST). With clear road map being laid down by the Finance Ministry, the Government seems on course to fast track the entire process to achieve targeted GST implementation effective 1 July 2017.
  • 6. Removal of cascading effect on taxes Free movement of goods and services Rationalize structure of indirect taxation Continuous chain of set off till the consumer Wider coverage of Input Tax and Service Tax set-off Destination principle The GST structure would follow the destination principle. Accordingly, imports would be subject to GST, while exports would be zero-rated. In the case of inter-State transactions within India, the State tax would apply in the State of destination as opposed to that of origin.
  • 7. TYPES OF GST CGST SGST IGST Intra-State Inter-State
  • 9. SGST State cess & surcharges Entertainment tax Luxury Tax VAT/ Sales tax Entry tax/ Octroi/LBT Purchases Tax Taxes on Lottery & Gambling
  • 10. TAX RATE Coverage Tax exempt 0% tax rate Commodities such as food grains, rice and wheat are included. First slab 5% tax rate Under which common-use items such as spices, tea and mustard oil will taxed at 5% Second slab 12% tax rate Under this slab, processed food items have been included. Third slab 18% tax rate Under this slab, items such as soaps, oil, toothpaste, refrigerator and smart phones have been included. Fourth slab 28% tax rate There are two tiers under this fourth slab:- White goods and cars will be taxed at 28% tax rate. 28% tax rate plus cess will be charged for sin products such as luxury cars, tobacco products, pan masala, and aerated drinks. Cess will be levied on top of the higher tax rate.
  • 11. 7% 14% 17% 43% 19% COMPOSITION OF GOODS UNDER TAXATION No tax, 0% 5% 12% 18% 28%
  • 16. 1) Securities transactions will become expensive: At present, the transactions on securities are excluded from the purview of Value Added Tax (VAT) and Service Tax. The GST regime is likely to change this practice and the delivery of securities would attract tax. 2) Compliance burden of mutual funds will go up substantially: As per the model of GST code, a tax incidence arises at the location where a service is being delivered. Besides this, the model law considers the head office of the Asset Management Company (AMC) and its branches different entities. The asset management activity of a fund house is usually centrally operated, while marketing and sales activities of the schemes run at various places. The problem arises when branches and the head office are treated as different entities. It is also unwise to treat transactions between the head office and the branches as "supply" of services.
  • 17. 3) Investors will suffer once the GST is implemented: Don't be surprised if mutual fund houses subsequently raise the expense ratios under most of their schemes. We not only provide fund management services, but in this effort, we utilise services of other entities such as custodians and brokerage houses. As a result, the expense ratio of the scheme investors have invested in includes the Service tax that the Asset Management Companies (AMCs) pay. 4) Mutual fund advice will also cost investors more: GST will also negatively affect distributors: If investors opt for arbitrary recommendations from mutual fund distributors who earn commissions from mutual fund houses, it could possibly hurt this category of financial professionals. 5) Impact on distribution levels: The government has exempted distributors' annual earning up to Rs. 20 lakh from paying service tax. Currently, distributors earning up to Rs. 10 lakh as a commission are exempted from paying service tax
  • 19. GST has been envisaged as a more efficient tax system, neutral in its application and attractive in distribution. The advantages of GST are: Wider tax base, necessary for lowering the tax rates and eliminating classification disputes Elimination of multiplicity of taxes and their cascading effects Rationalization of tax structure and simplification of compliance procedures Harmonization of centre and State tax administrations, which would reduce duplication and compliance costs Automation of compliance procedures to reduce errors and increase efficiency
  • 20. High Tax burden for manufacturing SMEs Increasing operating costs Change in Business software GST will be implemented in the middle of the year Increase in Taxes will increase the price Petroleum products are not a part of GST yet Registration in multiple states Problems Faced by E-commerce Composition scheme is available for many Businesses No Anti-Inflationary Measures
  • 21. Change is definitely never easy. It is important to take a leaf from global economies that implemented GST and overcame the teething troubles to experience the advantages of having a unified tax system, easy input credits, and reduced compliances. Once GST is implemented, most of the current challenges of this move will be a story of the past. India will become a single market where goods can move freely and there will lesser compliances to deal with for businesses. Twenty four states have passed the state GST (SGST) Act till June 5, while seven states, including Meghalaya, Punjab, Tamil Nadu, Kerala, Karnataka, Jammu & Kashmir and West Bengal are yet to pass the SGST Act . The Centre has said it will roll out the Goods and Services Tax (GST) on July 1 and it is crucial for all states to approve the SGST Act for smooth implementation of the tax reform measure.