The economic landscape of India witnessed a change when the Goods and Services Tax (GST) was rolled out on July 1, 2017. For the mutual fund industry, the same year also saw an addition of over 67 lakh folios while the Asset Under Management of the industry stood at Rs. 18.85 trillion in March, as represented by the Association of Mutual Funds in India (AMFI).
In the past four years, GST has undergone quite a few tweaks; so has the performance of the mutual fund industry over the years. With growing awareness of mutual fund investments, many investors have started their investment journey in mutual funds. Earlier, many investors used to invest their savings in traditional instruments such as fixed deposits, recurring deposits, and post office savings. This change can be gauged by the numbers reported in an April 2021 article by LiveMint. The mutual fund industry saw the addition of more than 80 lakh folios in 2020-2021, making the industry’s AUM grow to more than Rs. 33 trillion as on May 2021, as per AMFI.
This growth has likely been beneficial to many investors, making their wealth grow by way of returns which, in turn, are taxable by law. So, how have investors benefited from or have been affected due to GST? Has GST impacted their capital gains?
Impact of GST on mutual funds
The impact of GST on mutual funds has been minimal. GST is applicable on the fees that asset management companies charge. As the fee charged is nominal, the impact that GST has for an investor is quite marginal.
Mutual funds, GST and sectors of business ecosystem – The holy trinity
At the same time, many mutual funds are likely to invest heavily in various sectors such as Automobile, Consumer Durables, FMCG, and Logistics; these sectors have been impacted by GST, influencing mutual fund schemes to that limited extent.
Higher expense ratio
As per the new tax regime, a GST of 18% is applicable on the fees that asset management companies charge. Thus, if an investor wants to redeem, they will receive relatively lower returns, compared to what they would have before GST. To be sure, even before GST came in, a service tax of 15% was applicable on all these fees.
Accordingly, investors or asset management companies do not need to change their investment strategy as the GST impact for them is minimal. They can continue the existing strategy, and returns can still be high if investors stay invested for a long term.
Financial advice will be slightly expensive
If new investors want to seek advice from financial or investment advisors, they might need to incur more costs, as the GST is 18%. Financial planners might need to bear the brunt due to the slight increase in service tax.