Mutual funds get GST notices for exit load

financialexpress.com:

The Directorate General of Goods and Services Tax Intelligence (DGGI) has sent show-cause notices to a number of mutual fund (MF) companies in recent weeks, seeking to recover a tidy sum from them as goods and service tax (GST) on exit-load charges. According to an official source, the amount being sought to be recovered from the MF firms could be over Rs 150 crore.

Though the GST department “clarified” in 2018 that GST must be paid at 18% on exit load, most firms haven’t yet complied with the directive. The current set of notices are with respect to over 100 MF schemes, and at least Rs 10 crore has already been collected by the taxman as a few firms have opted to pay up.

Exit load is the fee charged by MF firms as investors redeem or sell their units before the expiry of the lock-in period. This fee serves as a cost imposed by the mutual fund company with the aim of discouraging investors from making hasty withdrawals of their funds.

For instance, if an investor purchased a mutual fund on January 1, 2018, with a one-year time frame and an applicable exit load of 1%, and they withdrew the amount before one year, the exit load of 1% would apply based on the scheme’s net asset value (NAV). This fee should be deducted at the time of redemption calculated from the NAV.

The Central Board of Indirect Taxes and Customs (CBIC) had said in 2018 that the exit load under mutual funds will be liable for GST. However, the industry contends that such charges are not collected for any service rendered to the investor, as it being just a deterrent to stop investors from exiting early. Hence, they are of the view that these charges should not fall under the purview of GST.

Rajat Bose, partner, Shardul Amarchand Mangaldas & Co, said this