Since its introduction in July 2017, the Goods and Services Tax (GST) has considerably altered the cost framework and regulatory requirements for mutual funds. A standard 18% GST is now applied to most services related to fund management, distribution, and daily operations, taking the place of the previous 15% service tax. This change has had a notable effect on the expenses and compliance duties associated with mutual funds.

What Are Mutual Funds?

Mutual funds operate as trusts that gather capital from numerous investors, which is then invested according to a predefined goal. An Asset Management Company (AMC) oversees these collective funds, adhering to trustee guidelines. Investors receive proportional shares of any profits or losses. In India, SEBI governs mutual funds, and every scheme must adhere to a Total Expense Ratio (TER) limit on its applicable fees. It is important to note that GST on mutual fund investments mainly targets the associated services, rather than the underlying securities.

Mutual Fund Charges and GST Applicability

According to GST legislation, the majority of services and charges associated with mutual fund operations are subject to a consistent 18% GST. This tax burden is ultimately passed on to investors, either directly or indirectly, through the fund's Total Expense Ratio (TER).

• Management and Advisory Fees: Asset Management Companies (AMCs) impose management and advisory fees calculated as a percentage of the Assets Under Management (AUM). These fees are subject to an 18% GST, which is then incorporated into the scheme's Total Expense Ratio (TER). AMCs are required to clearly state these charges, along with the GST, in the offer document, highlighting GST's role in mutual fund industry operations and transparency.
• Exit Loads: An exit load is a charge levied on early redemptions. An 18% GST is applied to this load amount, which reduces the final sum returned to the scheme, effectively making early withdrawals more expensive.
• Distributor Commissions and Transaction Charges: Distributors receive front-load and trail commissions, alongside fixed transaction fees (₹150 for new investors, ₹100 for existing investors for every ₹10,000 invested). These are all taxed at 18% GST. The standard GST rate on mutual fund commissions is 18%. Distributors registered under the GST composition scheme pay a reduced GST of 6% on their gross income but are unable to claim Input Tax Credit. Asset Management Companies generally quote commission rates that already include GST, illustrating how GST affects mutual fund distributors.
• Brokerage and Trading Fees: Costs associated with trade execution, such as brokerage, exchange fees, clearing fees, and depository participant (DP) charges, incur an 18% GST on their service component. These trading expenses are factored into the TER, reflecting the indirect GST burden on mutual fund brokerage for investors.
• Other Operational Fees: Charges for services rendered by custodians, trustees, auditors, registrars (RTAs), and marketers are also subject to 18% GST. Even statutory fees payable to SEBI are subject to GST as per regulatory directives. Consequently, GST on mutual fund agent services represents a continuous expense.
• Sale and Redemption of Units: The actual buying, selling, or redeeming of mutual fund units is not subject to GST. This is because these units are classified as "securities" under GST law. Thus, while fund management service components are taxable, the units themselves fall outside the scope of GST.

Types of Mutual Funds Affected by GST

A consistent 18% GST is imposed on all mutual fund schemes. This tax targets all service-related elements, such as management fees, distributor commissions, and transaction charges, and is incorporated into the fund's Total Expense Ratio (TER). This standardized application ensures that GST rates on mutual funds remain constant, regardless of the fund's specific category.

• Equity & Debt Funds: Both equity and debt funds are subject to an 18% GST on their service fees. Although equity funds also incur Securities Transaction Tax (STT) on transactions, debt funds do not; however, both types face GST on their management and advisory expenses.
• Hybrid, Index, and ETFs: GST is applied equally to both actively and passively managed funds, including fund-of-funds and schemes designed for tax savings. Any new fund offerings or trailer commissions are also subject to an 18% tax, influencing the GST paid by mutual fund distributors.
• Sector & Thematic Funds: These funds do not receive any specific GST concessions. While the industries they invest in may experience varying GST impacts at a business level, the fund's own expense structure consistently incurs an 18% tax. This demonstrates that GST's influence on the mutual fund industry extends across various sectors.

Impact of GST on Mutual Funds

The implementation of GST has resulted in varied consequences for mutual funds, leading to a slight increase in expenses while simultaneously streamlining tax processes. Notable effects include:

• Higher Investor Costs: The 18% GST applied to mutual fund services has caused a slight increase in the Total Expense Ratio (TER) compared to the previous 15% service tax. This means investors may see slightly reduced returns, as the tax burden is integrated into the fund's operational costs. Additionally, exit loads result in lower amounts credited back to the scheme due to GST deductions.
• Expense Ratio Modifications: Funds have adjusted their internal cost distributions to account for the increased tax rate. While the overall TER stays within SEBI-mandated limits, a marginal rise has been observed, stemming from the transition from a 15% service tax to an 18% GST. This emphasizes the GST rate on mutual fund commissions as a significant cost factor.
• Distribution Expenses: Distributor commissions are taxed at 18%, thereby increasing the cost framework for AMCs offering regular plans. However, investors who opt for direct plans, which do not involve distributor fees, are unaffected by this particular GST component.
• Compliance Obligations: GST has introduced additional compliance requirements for Asset Management Companies (AMCs), trustees, and distributors. These include obtaining GST registration, submitting tax returns, issuing tax invoices, and managing input tax credits.
• Investment Preferences: While long-term investment patterns have largely remained consistent, investors who are particularly sensitive to costs are inclined to choose low-expense schemes and direct plans, such as index funds and Exchange Traded Funds (ETFs), to minimize tax-related costs.
• Input Tax Credit for Distributor Services: With GST, AMCs are now permitted to claim input tax credit on services provided by distributors, a benefit that was not available under the prior tax system. This helps to partially offset higher costs but necessitates accurate invoice documentation, adding operational complexity for those involved in handling GST on mutual fund commission agent processes.
• Costlier Financial Guidance: Services from financial advisors and distributors are now subject to an 18% GST, rendering professional investment advice more expensive for individual investors.

GST Impact on Mutual Funds Across Sectors

The Goods and Services Tax in India has introduced sector-specific consequences for mutual funds, as follows:

• Automobile & Transportation: The GST framework has simplified the tax system, leading to a reduction in the tax burden for consumers. This has positively impacted companies like Maruti Suzuki and Mahindra & Mahindra, resulting in favorable returns for mutual funds invested in this sector.
• Logistics: GST has facilitated smoother inter-state commerce by eliminating redundant taxes and enabling centralized operations. Companies such as Container Corporation of India have benefited, thereby enhancing the performance of mutual funds with exposure to the logistics sector.
• FMCG: The Fast-Moving Consumer Goods (FMCG) sector has undergone tax rate adjustments under GST, influencing its cost structures. Companies like Hindustan Unilever and Godrej Consumer have successfully adapted to these changes, which in turn has affected mutual fund returns within this sector.
• Consumer Durables: With a 28% GST rate, the consumer durable category faces increased costs. Despite this, companies such as Voltas and Havells continue to deliver consistent returns, which is evident in mutual fund performance.
• Real Estate: The real estate sector benefits from input tax credits under GST, leading to improved cost efficiency. This has had a positive influence on firms like Sobha and Oberoi Realty, impacting mutual funds tied to real estate investments.
• Airlines: The aviation industry has observed varied outcomes from GST. While reduced tax rates are advantageous for economy-class travel, the overall effect on airlines such as InterGlobe Aviation and SpiceJet remains mixed, a trend reflected in mutual fund returns.