As we all are now familiar with the the latest and prodigious tax reform that came into existence in market from 30 july'2017 midnight. GST (Goods and Service Tax) is hovering over the market unlike any other step ever taken after the independence related to tax rectification. GST is a indirect tax which will now be paid by the consumers. Almost 17 taxes and 23 cesses are being removed by the coming of GST. It comes with a increment in slab of 5% , 12% , 18% , 28% that is imposed on the goods where it is directly consumed. Whenever a new rule or a reform hits the country's law it is likely to put the different sectors into dilemma. Same is the case with the financial market.
However, GST managed to affect the financial sector in the most complicated manner. Their is a Fund built up in the expense ratio which has led many mutual fund companies into trouble. GST's main motive is to withdraw the taxes which are imposed on the different levels starting from the manufacture and finally when it is consumed. So, all the in-between taxes gets vanished. The problem arises when it comes to the Mutual Funds sector. Asset Management activity of fund house is usually centrally operated while marketing and sales activities of the schemes run at various places or branches of the company itself. With the coming of tax reform now the head office or a fund house and it's branches will be considered as separate entity which will increase the revenues. Earlier, transactions were excluded from the limit of VAT and Service Tax but now the securities would attract tax. Expense ratio will increase and also the initial CapEx. Earlier the service tax for the investment management fees was 15% and now it increases with 18% in market. VAT was imposed on the different stages of production whereas GST is imposed directly to the one who is getting the end product. In terms of market the higher expense ratio, the lower returns. In India people usually don't invest in mutual fund as they are reluctant of not getting the profits that they expect. GST has created a kind of volatility in the market where people are confused about the fund outcomes of such a tax reform.
Not only the fund houses but the distributors will also be affected. Under existing law, Distributors having an income less than 10 lakhs annually do not need to pay any service tax but now they will have to register separately under GST and later exert release. Distributors earning more than 20 lakhs will be stimulated to some extend. No GST will be imposed on the sales and purchases of securities. Their will be a hike in tax liability affecting the business of the mutual fund houses.
Investors will too get induced if the companies are paying more than the usual. They might see a marginal difference in the turnouts. Investors will pay higher sums (premiums) to invest in mutual funds. Investment strategy will not to be changed under such circumstances but surely a marginal difference will be there in the schemes. It allows the input tax credit.
Country's business level will thus increase. In mutual funds, the total expense ratio (TER) charged for managing funds and distributor commissions etc. would increase by 4-5 basis points. TER for mutual funds is going to vary between 1.25 percent and 2.75 percent according to the ratios. Though the reform is creating chaos in the market it's going to come out as an extravagant decision of legislation which will improve the composure of business and the financial zone. In a long run GST will help to built up the stock market which in return is going to benefit the investor in future.
Keywords: Investment, Mutual Funds
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