GST and mutual funds in India: a case study

This case study is geared towards understanding the impact of Goods and Services Tax on Mutual Funds in India.
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GST and mutual funds in India: a case study International Journal of Management (IJM) Volume 11, Issue 5, May 2020, pp. 179-184, Article ID: IJM_11_05_017 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=11&IType=5 Journal Impact Factor (2020): 10.1471 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 DOI: 10.34218/IJM.11.5.2020.017 © IAEME Publication Scopus Indexed GST AND MUTUAL FUNDS IN INDIA: A CASE STUDY Rohan Benjamin Research Scholar, Institute of Management, Commerce & Economics, Shri Ramswaroop Memorial University, Lucknow, India Dr. Alka Singh Associate Professor, Institute of Management, Commerce & Economics, Shri Ramswaroop Memorial University, Lucknow, India ABSTRACT The Goods and Services Tax is considered to be a revolutionary step in the Indirect Tax regime of our nation and is geared towards subsuming all other Indirect Taxes which are currently prevailing. In India, this reformatory taxation system became applicable from 1st July, 2017 and the jounce of Goods and Services Tax has been noted in the prices of almost the entire range of goods and services starting with manufacturers and going up to the end users. Since this tax covers services in its ambit, its brunt has also been felt by providers of Investment Services as well. Earlier a service tax of 15% was charged from the Asset Management Companies (AMCs) which in turn affected the scheme’s Net Asset Value (NAV). After the implementation of GST this rate has been raised to 18% which has increased the expense ratio of the mutual fund houses by 3%. This rate of 18%has been prescribed for the financial service industry thereby leading to an increase in the tax liability for mutual fund distributors. This rise in the rate of tax leads to an increase in the expense ratio of mutual fund schemes and the blow is ultimately taken by the consumers i.e. the mutual fund investors. This case study is geared towards understanding the impact of Goods and Services Tax on Mutual Funds in India. Key words: GST, Mutual Funds, Impact Cite this Article: Rohan Benjamin and Dr. Alka Singh, GST and Mutual Funds in India: A Case Study. International Journal of Management, 11 (5), 2020, pp. 179-184. http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=5 http://www.iaeme.com/IJM/index.asp 179 editor@iaeme.com Rohan Benjamin and Dr. Alka Singh 1. INTRODUCTION 1.1. What is GST? GST is a comprehensive levy of tax on goods and services, whenever there is a sale of goods or rendering of service. An Input Tax Credit mechanism has also been incorporated in this system the benefit of which can be availed by the entire supply chain except for the ultimate consumer who does not get any set off of the tax paid by him. This system of taxationis aimed towards wiping out the difference between taxable goods and taxable services. 1.2. What are Mutual Funds? A mutual fund is a vehicle through which a number of individuals contribute to a common pot of money which is then used to invest in the various Equity and Debt securities offered by the Companies forming the portfolio of a particular mutual fund scheme. The returns earned by these investments are distributed among the contributors of the money pot in the ratio of their respective shares of contribution. 1.3. Background Prior to 1st July 2017 a service tax of 15% was charged from the Asset Management Companies (AMCs) for providing investment related financial services which in turn affected the scheme’s Net Asset Value (NAV). After the implementation of GST this rate has been raised to 18% which has increased the expense ratio of the mutual fund houses by 3%. This rise in the rate of tax is ultimately borne by the investor who now witnesses a slight increase in the expense ratio under of the investment schemes. 2. OBJECTIVE OF THE STUDY The study is geared towards understanding the impact of Goods and Services Tax on the returns provided by mutual funds in India. 3. RESEARCH METHODOLOGY Since there is an increase of 3% in the Post GST Tax on Mutual Funds, therefore the Pre – GST expense ratio of a mutual fund scheme has been arrived at by using the under mentioned formula: - Post – GST Rate of Expense Ratio x 100/103 Only the impact of a change in the rate of tax has been considered while calculating the changes in the expense ratio of the mutual fund scheme. The expense ratio for the mutual fund scheme has been assumed to remain constant Pre and Post GST while including For the purpose of calculations SBI Bluechip Fund – Direct Plan has been used. *The only difference between a Direct Plan and a Regular Plan is that in case of a direct plan the units of mutual fund are directly purchased from the Asset Management Company or mutual fund house and therefore no commission is payable to broker whereas in a regular plan the broker is paid a commission by the AMC for the acquisition of customers i.e. investors in mutual funds. This commission is included in the expense ratio of the scheme which is then passed on to the investor thereby slightly lowering the returns in case of a regular plan. http://www.iaeme.com/IJM/index.asp 180 editor@iaeme.com GST and Mutual Funds in India: A Case Study The Pre – GST and Post – GST returns are then compared to arrive at the conclusion as to the impact of GST on mutual funds in India. 4. WHAT IS EXPENSE RATIO? A number of expenses are incurred by an Asset Management Company. For instance, marketing expen ...