Impact of GST on MF investments

The countdown for implementation of GST has begun and within a matter of days, the new tax regime will take effect across the country. Industry analysts are assessing the impact the GST will have on various industries.

Jun 25, 2017 06:06 IST India Infoline News Service

The countdown for implementation of GST has begun and within a matter of days, the new tax regime will take effect across the country. Industry analysts are assessing the impact the GST will have on various industries. Industries and sectors will be positively or negatively impacted depending upon whether the GST has decreased or increased the tax burden on the specific industries and sectors.

For the banking and other financial services, the new tax regime will have a somewhat negative impact. To put things in perspective, we need to take into consideration the current tax rate on various financial services and transactions to assess the impact. Currently, service tax at the flat rate of 15% is levied on these services and transactions. Under the GST, there are four slabs of tax rates for taxation of all goods and services, namely, 5%, 12%, 18% and 28%. Financial services and transactions will be taxed at the rate of 18% under the GST. So, the tax rate increases by 3%, which the consumer of these services have to bear as the banking and financial services companies would pass on the additional burden to their customers.

As for mutual funds, the GST would be levied on the various expenses incurred by the asset management companies (AMCs). As a result, the total expense ratio (TER) of the AMCs will go up, thereby impacting the net asset values of the mutual fund schemes. However, since there is a cap on expenses that AMCs can charge to the corpus of the MF scheme, the AMCs may have to reduce their management fees if the TER is utilised to the maximum limit by the AMC and if it is not revised upward by SEBI. However, if the TER is well within the maximum limit, the AMC would certainly pass on the increased tax burden to the investors. However, since there is no clarity as yet on which of the expenses of AMCs would attract GST, it is also not clear how much will be the exact increase in tax that will be passed on to the investors.

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