Problems plaguing the mutual fund industry in India appear to be far from over. Competition and cost escalations have caused many fund houses to shut shop in recent times. On the other hand, a majority of Indians are reluctant to invest in mutual funds and pose a threat to the growth prospects of the industry. Yes, Assets Under Management (AUM) of the mutual fund industry have been growing at a faster pace, but considering the true size of the market, mutual funds are still an unattractive option with the masses.

To add to the industry's worries, implementation of the Goods and Services Tax (GST) has opened up a new battlefront. Under the new regime, investing in mutual funds may cost investors more, as the cost of compliance for the fund houses is likely to shoot up substantially unless the Government provides some relief.

Industry players have teamed up to make their case. Last month, the Association of Mutual Funds in India (AMFI), along with PricewaterhouseCoopers (PwC) voiced the concerns of the industry and provided some valuable inputs to the GST Commissioner, Mr Upendra Gupta .
 

• At present, securities transactions are excluded from the purview of Value Added Tax (VAT) and Service Tax. The GST regime is likely to change this practice and the delivery of securities would attract GST.
   
• The industry has reservations about taking such a step, and rightly so, as such a move may put the entire sector in to disarray. 
   
• Under the model GST code, tax incidence arises at a location where the service is being delivered. This apart, the model law considers the head office of the Asset Management Company (AMC) and its branches different entities. As you may know, the asset management activity of a fund house is usually centrally operated, while marketing the schemes run in various places.
   
• The problem arises when branches and the head office are treated as different entities. It is also unwise to treat transactions between the head office and the branches as “supply” of services.
   

AMFI suggestions…

On this backdrop, AMFI has urged that the GST regime should allow the registration of AMCs for taxation purpose to be centralised and encompass the particulars of business happening everywhere. It has also highlighted the enormous burden of the compliance norms mutual fund houses have to shoulder.

According to AMFI, "It is prayed that rate of tax be made applicable to the MFs so as to ensure the investors/unit holders are not deterred from investing in the MF sector due to high rate of GST and in favour of other avenues of investments where returns are not expected to be liable to GST."
 

PersonalFN is of the view that cost cautious investors should consider direct plans offered by mutual fund houses. Direct plans have a lower expense ratio as they eliminate the distribution costs and fund houses pass on the benefit of this to investors. Over the long term, these savings may increase the returns for investors. Having said this, the expense ratio shouldn't be the only parameter weighed in particular to invest in equity schemes.

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