GST on Mutual Funds: Charges, Rates and Sector-Wise Impact

Since its implementation in July 2017, the Goods and Services Tax (GST) has significantly influenced mutual funds' cost structure and compliance landscape. Most services linked to fund management, distribution, and operations now attract a standard 18% GST, replacing the earlier 15% service tax. This has led to a noticeable impact of GST on mutual funds in terms of costs and compliance obligations.

What Are Mutual Funds?

A mutual fund is a trust aggregating capital from many investors and investing it according to a stated objective. An Asset Management Company (AMC) manages the pooled funds under trustee oversight. All investors share proportionally in gains and losses. SEBI regulates mutual funds in India, and each scheme has a Total Expense Ratio (TER) cap on the fees it may charge. The GST on mutual funds investment primarily applies to services, not to the securities themselves.

Mutual Fund Charges and GST Applicability

Under GST law, most services and fees related to mutual fund operations attract a uniform 18% GST. Investors ultimately bear this tax burden either directly or indirectly through the TER. 

• Management and Advisory Fees: AMCs charge management and advisory fees as a percentage of Assets Under Management (AUM). GST at 18% is levied on these fees and included in the scheme's TER. AMCs must disclose these charges, including GST, in the offer document, demonstrating the impact of GST on mutual fund industry operations and transparency.
• Exit Loads: Exit load is a fee imposed on early redemptions. GST at 18% is applied to the load amount, reducing the net amount credited back to the scheme and effectively increasing the cost of premature withdrawals.
• Distributor Commissions and Transaction Charges: Distributors earn front-load and trail commissions, as well as fixed transaction charges (₹150 for new investors, ₹100 for existing investors per ₹10,000 invested), which are taxable at 18% GST. The GST on mutual fund commission is standard at this rate. The distributors registered with GST under the composition scheme pay a lower GST of 6% on gross income but cannot claim Input Tax Credit. Typically, AMCs quote commission rates inclusive of GST, which shows the impact of GST on mutual fund distributors.
• Brokerage and Trading Fees: Charges for executing trades, including brokerage, exchange fees, clearing fees, and depository participant (DP) charges, all attract 18% GST on the service portion. These trading costs are included in the TER, and this reflects the GST on mutual fund brokerage borne by investors indirectly.
• Other Operational Fees: Fees paid to custodians, trustees, auditors, registrars (RTAs), and marketers also attract 18% GST. Even statutory fees paid to SEBI are subject to GST as per regulatory guidance. Thus, GST on mutual fund agent services is a recurring cost component.
• Sale and Redemption of Units: The sale, purchase, or redemption of mutual fund units is not subject to GST, as these are considered "securities" under GST law. Therefore, while the service components of fund management are taxable, the units are outside GST's scope.

Types of Mutual Funds affected by GST

GST at 18% applies uniformly to all mutual fund schemes. The tax is levied on all service components, including management fees, distributor commissions, and transaction costs, and is reflected in the fund's Total Expense Ratio (TER). This uniformity reinforces the GST rates on mutual funds irrespective of fund type.

• Equity & Debt Funds: Both attract 18% GST on service fees. While equity funds also incur Securities Transaction Tax (STT) on trades, debt funds do not, but both face GST on management and advisory costs.
• Hybrid, Index, and ETFs: GST applies identically to active and passive funds, including fund-of-funds and tax-saving schemes. Any new fund offers or trailer commissions are also taxable at 18%, impacting the GST on mutual fund distributors.
• Sector & Thematic Funds: There is no special GST treatment. Although the underlying industries may be differently affected by GST at the business level, the fund's expense structure is taxed at 18%. Thus, the impact of GST on the mutual fund industry is seen across sectors.

Impact of GST on Mutual Funds

GST has had a mixed impact on mutual funds, marginally raising costs and simplifying taxes. Key effects include:

• Increased Costs to Investors: GST of 18% on funds-related services has marginally raised the TER over the previous 15% service tax. This translates to marginally smaller returns for investors since the burden of tax is built into the cost of the fund. Exit loads also return less to the scheme due to GST deduction.
• Expense Ratio Adjustments: Funds have realigned internal cost allocations to accommodate the higher tax rate. While overall TER remains within SEBI-prescribed caps, a slight uptick has occurred due to the shift from 15% service tax to 18% GST, , highlighting the GST rate on mutual fund commission as a key cost driver.
• Distribution Costs: Distributor commissions are taxable at 18%, increasing the cost structure for AMCs in regular plans. Investors in direct plans, where distributor fees are absent, are not affected by this component of GST.
• Burden of Compliance: GST has imposed an extra compliance burden on AMCs, trustees, and distributors. These involve GST registration, filing returns, raising tax invoices, and dealing with input tax credits.
• Investment Trends: Although long-term investment trends have not altered much, cost-conscious investors are likely to prefer low-cost schemes and direct plans such as index funds and ETFs to minimise tax-burdened costs.
• Input Tax Credit on Distributor Services: Under GST, AMCs can now claim input tax credit on distributor services, which was disallowed under the earlier regime. This helps partially offset increased costs but depends on proper invoice documentation, which adds operational demands for those handling GST on mutual fund commission agent processes.
• Expensive Financial Advice: Services from financial advisors and distributors now attract 18% GST, making professional investment advice costlier for investors.

GST Impact on Mutual Funds Cross Sectors

GST in India has had sector-wise implications for mutual funds:

• Automobile & Transportation: The GST regime has simplified the tax system, reducing consumers' tax burden. This has benefited companies such as Maruti Suzuki and Mahindra & Mahindra, causing positive returns to mutual funds that have invested in this sector.
• Logistics: GST has eased inter-state trade by removing double-entry taxes and allowing centralised operations. Container Corporation of India is one such company that has gained and improved the performance of mutual funds with exposure to the logistics sector.
• FMCG: The FMCG industry has seen tax rate changes under GST, impacting cost structures. Hindustan Unilever and Godrej Consumer are some companies that have managed to navigate these changes, which have impacted mutual fund returns in this sector.
• Consumer Durables: At 28% GST, the consumer durable segment incurs higher costs. Even so, firms such as Voltas and Havells are retaining stable returns, which show up in mutual fund performance.
• Real Estate: The real estate segment enjoys input tax credits in GST, enhancing cost effectiveness. This has positively impacted firms such as Sobha and Oberoi Realty, which affect mutual funds related to real estate investment.
• Airlines: The aviation industry has experienced mixed results from GST. While lower tax rates favour economy-class travel, the overall effect on airline companies such as InterGlobe Aviation and SpiceJet is mixed, which is reflected in mutual fund returns.