Impact of GST on the Financial Advisory Business

GST is finally here, and financial services have been slotted under the 18% bracket as against the 15% under Service Tax. Also, smaller businesses, billing less than Rs. 20 lakh p.a., are exempt. However, that is not the only change.

Compliance

Under GST, all financial services providers are required to register (in all the states they operate in) and get GSTIN numbers. With GST registration, service providers will come under forward charge mechanism, where they will directly pay tax and reap the benefits of input tax credit. Service providers will have to pay the applicable GST for goods and services availed from any vendor (supplier of goods or provider of services) who is not registered under GST.

To offset the costs of reverse charge mechanism, institutions require that all their vendors register under GST. This process might seem complicated in the beginning but will become a common practice as organizations get used to it.

Input Tax Credit

GST covers both supply of goods as well as services. Financial providers can avail input tax credit with respect to services availed by them as well as any capital goods which were purchased directly from the manufacturer.

The input tax credit can be set off against output tax liability for services rendered by them. With the implementation of GST, the cascading tax effect on the sale of goods and services will be eliminated.

Impact on Investments

The GST will be levied on brokerage charges paid for purchase and sale of shares through a broker. In stock broking, the service tax calculated is a very small proportion of the overall transaction and a 3% rise under GST, will not have a major impact on the overall charge.

The total expense ratio (TER) for mutual funds ranges between 1.25% and 2.75%. After GST, the TER would rise by 4-5 basis points. GST is also applicable to the fund management charges levied by the fund houses in respect of the investments and redemption made. These costs are, however, not visible as they get deducted from NAV on a daily basis. GST will also apply to the exit load charged by fund houses where ever applicable.

Smaller mutual fund distributors, billing less than Rs. 20 lakh p.a., are exempt from GST. However, according to experts, registering and obtaining a GST number is mandatory for all MF distributors, irrespective of their turnover. Under the reverse charge mechanism, AMCs will directly deduct the 18% GST from distributors who do not register for GST. Those who have a GST registration will come under the forward charge mechanism, whereby the tax will have to be paid directly by the distributor.

Opportunities to Inform and Engage

Overall, there will be marginal increase in the expenses across various financial products and services. The play of forward charge mechanism, input tax credit, compliance cost and rise in tax will create an effect that is sustainable and enduring.

Any drastic change in the investment strategy of the companies and investment pattern of the clients is unlikely. This phase of anxiousness is an opportunity for advisors to educate their clients on the impact of GST on their investments and to build credibility.

Edelweiss Partners is GST-ready and offers you all the relevant tools, calculators, and platforms for your business. Register with us to learn more.

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