Show Cause notices (SCNs) to several mutual funds’ houses on exit-load charges by the GST department – Unsettling the settled
The Directorate General of Goods and Services Tax Intelligence (DGGI) has reportedly sent show-cause notices to some mutual fund houses in order to recover goods and service tax (GST) on exit-load charges. The DGGI said that the department is chasing to recover a whopping amount of Rs. 150 crores from these mutual fund companies by initiating proceedings.
The Central Board of Indirect Taxes (CBIC) in 2018 had clarified that GST must be paid at 18% on exit load, which most of these firms haven’t complied with. The current set of notices are with respect to over 100 MF schemes, and at least Rs 10 crore has already been collected by the GST department, as a few firms have opted to pay up, as reported by the multiple newspapers.
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History of the Mutual Funds in India:
The mutual fund in India started its journey in the year 1963 with an aim to encourage and promote savings and investments through the security market regulated by currently the Securities and Exchange Board of India (SEBI). It was necessitated by a vision of a developed economy having a strong and vibrant financial market with broad participation by different stakeholders, which includes inter alia retail investors and institutional investors.
What is exit-load?
Exit-loads in mutual fund refers to a fee levied by the Asset Management Companies when investors redeem their mutual fund units before a specified period/prematurely. It acts as a deterrent against pre-mature withdrawals and aims to discourage investors from frequent trading, and also to compensate the fund for potential cost(s) associated with an early redemption of the units, promoting stability within the fund framework. It also aims to protect long-term investors from the potential adverse effects of short-term trading activities and cartelisation. And also acts as a deterrent against short terms investments, encouraging long-term commitments. The exit load amount is typically a percentage of the redemption value and varies based on the duration of the investments. These exit loads are specific to a mutual funds scheme which is explicitly stated in their Key Information Memorandum (KIM)/Scheme Information Documents (SID).
As per Regulation 51A of the SEBI (Mutual Funds) (2nd Amendment) Regulations, 2012, it is now a mandate that if any mutual fund scheme administered by the AMCs levy an exit load on redemption of units, the same shall be credited to the scheme itself which eventually affects the NAV of the scheme.
The applicability of GST in mutual funds:
Since mutual funds, by its very objective and definition are a money management service, it automatically come within the purview of the GST Act, 2017. In the pre-GST regime, 15% service tax was levied on the Asset Management Companies (AMC) for providing mutual fund and allied services which formed a part of the expense ratio, impacting the Net Asset Value (NAV) of the scheme itself. From 1st July, 2017, the aforesaid rate of tax has been raised to 18% which has increased the expense ratio of the mutual fund schemes by 3% to comply with the rate of tax specified by the GST department. So, it is implied that the expense ratio itself includes the net GST to be levied on the service(s) [which includes every transaction under a scheme] provided by the AMCs. It is pertinent here to understand that levying GST on any further transaction should be treated as a cascading of taxes which is itself against the very nature and spirit of the GST legislation.
Key take aways:
It can be inferred upon that levying GST on exit-load of mutual funds is itself goes against the principles of equity and can be considered as a ‘hair-splitting activity’ by the revenue department. The exit-load on mutual funds is itself a penal provision to ensure fair market practice and to curtail the negative impact of trading activities. Ergo, the same should assailed before the appropriate authority or courts from the prism of simplistic tax structure devoid of multi-layered taxation within the premise of a mutual fund scheme. Therefore, levying GST on exit-load would prove to be detrimental to long term investment which will increase the volatility in the market impacting the economy as a whole, the brunt of which has to be borne the investor fraternity.
Author Bio
Read with thanks, but issue is vexed.