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- 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.
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- 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 expenditure is incurred towards the advertising of the funds offered by their
company through various advertising media, distribution expenditure is incurred for
maintaining various distribution channels as in the appointment of brokers and underwriters
who are hired for commission, administrative expenditure may be incurred in maintaining the
offices of the AMC and research expenses are incurred to continue research for various new
and lucrative investment avenues. These expenses when clubbed together are known as the
expense ratio and are borne by the investor. As a result, the presence of expense ratio lowers
the returns for the investors by a certain percentage as charged by a particular mutual fund
scheme. E.g. If the annual returns of a particular mutual fund scheme are 12% and the
associated expense ratio is 1%, then the net annual return of the scheme will be 11% i.e. (12%
- 1%) respectively.
5. TYPES OF MUTUAL FUND CHARGES INCLUDED IN THE
EXPENSE RATIO
In the ordinary course of business, the investors are required to pay two types of charges,
namely, One Time Charge and Recurring Charge. These are being explained in brief
hereunder –
5.1. One Time Charge
These are the charges which are incurred during the inceptive phase when starting investing.
This can be understood by considering it as the buy in tariff paid when entering a Poker
tournament.
5.2. Load
Load is the fees or commission that an Asset Management Company or an Intermediary
thereof may collect either prior to or subsequent to the making of an investment. The two
types of applicable loads are entry load and exit load.
5.3. Entry Load
Prior to August 2009 an investor was required to pay a charge called entry load whenever he
purchased units of a mutual fund. But in August 2009 this charge was deferred by SEBI for
mutual funds alone. Entry load is still applicable on the purchase of stocks.
5.4. Exit Load
In order to encourage an investor to stay locked in the investment over a long period of time,
an exit load is charged by mutual fund schemes. This charge may vary from 0.25% to 4%,
depending upon the scheme. If an investor redeems his units after the lock in period then exit
load is not charged.
5.5. Recurring Charge
This fees is paid by the investor on a recurring basis either daily, quarterly or annually. This is
charged for maintaining the investors portfolio as well as for providing advisory services.
http://www.iaeme.com/IJM/index.asp 181 editor@iaeme.com
- Rohan Benjamin and Dr. Alka Singh
5.6. Management Fee
This is the fees paid to the Fund Manager for rendering the valuable service of managing a
particular fund.
5.7. Distribution and Service Fee
The AMC charges an investor for the marketing, printing and mailing done to keep the
investor informed about the latest developments regarding their particular investments as well
as about the investment market in general.
5.8. Switch Price
There can be Intra AMC or Inter AMC switching between mutual fund schemes. This means
that a person can switch from Scheme A to Scheme B of the same fund house or even a
different fund house, but this switching is done at a price called the Switch Price.
6. GST IN THE EXPENSE RATIO
18% GST is to be paid by Asset Management Companies on the Investment Management
Fees charged by them. This rate was 15% under the Service Tax regime. Under both GST as
well as Service Tax regime the tax paid forms a part of the expense ratio. GST being an
indirect tax will ultimately be borne by the consumers i.e. the investors as reflected in the
enhanced expense ratio.
Case: In my own portfolio, I have invested Rs.10,000/- lumpsum in SBI Bluechip Fund –
Direct Plan. What is the impact that GST will have on my investment as I plan to stay
invested in this scheme for the next 10 years?
6.1. Impact of GST on the long term returns of SBI Bluechip Fund – Direct Plan
Returns of the Scheme since inception (As on Feb. 29, 2020)* = 10.13%
Total Expense Ratio of the Scheme (As on Feb. 29, 2020)** = 1.03% (Post GST)
Absolute Returns (Post GST) = Return since inception – TER
= 10.13% - 1.03%
= 9.10%
Pre – GST Expense Ratio of the Scheme = 1.03 * 100/103 = 1.00% (Approx.)
Pre - GST Absolute Returns = 10.13% - 1.00%
= 9.13%
If Rs. 10,000/- is invested lumpsum in the scheme today then the return after 10 years
@9.10% will be – Rs.23,892/-***
If Rs. 10,000/- had been invested lumpsum in the scheme 10 years prior to the
implementation of GST then the returns today @9.13% would have been – Rs.23,958/-***
There is a marginal decrease in the returns provided by the scheme in the long run i.e.
Rs.23,958 – Rs. 23,892 = Rs.66/- only.
% Decrease in Returns = 66/23,958 x 100
= 0.27% (Approx.)
7. CONCLUSION
There has been a 3% increase in the rate of taxes on mutual funds under the GST regime as
compared with the earlier system of Service Tax but when we compare the absolute returns
http://www.iaeme.com/IJM/index.asp 182 editor@iaeme.com
- GST and Mutual Funds in India: A Case Study
from mutual funds, it is observed that there is only a marginal decrease in the absolute returns
from the scheme i.e. 0.27% only.
Thus, we can conclude from the above observation there is only a marginal decrease in the
absolute returns from SBI Bluechip Fund – Direct Plan if a sum of Rs.10,000/- is invested for
a period of 10 years.
*https://www.sbimf.com/en-us/equity-schemes/sbi-bluechip-fund#Performance
** https://www.bankbazaar.com/mutual-fund/sbi-blue-chip-fund-direct-plan-growth-
option.html
*** https://money.mobikwik.com/calculators/lumpsum-calculator
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