GST might hit small fund distributors, investment advisors: 6 Jul 2017

mutual funds

The advent of the goods and services tax (GST) is likely to hit small distributors and investment advisors, says the mutual fund (MF) sector.

Players say ambiguity over input tax credit and inter-state transactions has created confusion among distributors, particularly those earning less than Rs 20 lakh a year.

Meanwhile, fund houses and the Association of Mutual Funds in India (Amfi) are helping distributors get GST-ready, by conducting workshops and educating through lists of ‘Frequently asked questions (FAQs). Amfi has also appointed consultancy entity PwC India to assess the impact on the sector.

According to industry players, registration and obtaining of GST number is mandatory for all MF distributors, irrespective of their income.

Fund houses are expected to deduct GST from distributors’ commission, even those whose income is below the threshold of Rs 20 lakh if they haven’t provided their GST number. Those providing it will be paid the entire brokerage and distributors will have to do the GST filing at their end. Sector executives have urged all distributors to register for getting the input tax credit.

There is a lack of clarity on how independent financial advisors (IFAs) will be eligible for this credit, as many don’t operate out of offices.
There is also a lack of clarity over inter-state and intra-state transactions, say players.

Most fund houses are registered in Maharashtra. Earlier, the impression was that distributors with less than Rs 20 lakh annual income and registered in the state were exempt from GST. However, if distributors operate outside the state, there would be no exemption, say experts. That would mean an impact on distributors, particularly IFAs.

Manoj Nagpal, chief executive of Outlook Asia Capital, says: “MFs are a unique case and GST might work as a disadvantage to the sector from distributors‘ point of view. IFAs will be negatively impacted. The sector could go through short-term turmoil. Newcomers to the (MF) distribution business might find GST an entry barrier and feel the pinch of double-taxation in a business which has thin profit margins. Further, the compliance
requirement is so large that not only new distributors but existing ones, too, whose income is way below Rs 20 lakh per annum might find it difficult to carry on.”

Some distributors have suggested that fund houses offset the GST impact and make it neutral for small distributors.

The average payout to a distributor is around Rs 5 lakh annually; there are about 86,000 registered IFAs. However, a large chunk of the brokerage is cornered by a few big entities such as banks and national distributors, leaving little for IFAs.

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