Nifty 50 and Sensex close week with gains as global triggers loom

This is a Mint Premium article gifted to you.Subscribe to enjoy similar stories.

Mutual fund distributors have urged the Association of Mutual Funds in India (Amfi) to bring their services under the reverse charge mechanism (RCM), saying it could partly offset the income loss caused by the market regulator’s revised total expense ratio (TER) rules, according to three people aware of the development.

“Some small distributors have reached out to Amfi to include mutual fund distributors under the reverse charge mechanism to cope with the income hit caused by the revised TER norms,” said the first of the three people cited above, all of whom spoke on condition of anonymity.

“RCM could help some distributors regain the pay they lost when GST (goods and services tax) was placed over and above the base expense ratio,” the person added.

The request comes after the Securities and Exchange Board of India (Sebi) overhauled expense ratio calculations in December. Under the new framework, the total expense ratio has been split into the base expense ratio (BER) and statutory and regulatory levies such as GST, securities transaction tax, stamp duty and regulatory fees, which are now charged separately over and above the base cost.

The asset management company (AMC), hence, is only liable to pay the distributor the base expense ratio. The GST component is released only when the distributor raises a tax invoice, which becomes unviable for those who are either exempt from paying GST or come under the composition scheme. This is in contrast to the earlier regime, where the GST component and the expense ratio was clubbed together regardless of whether a distributor pays GST or not.

Queries emailed to Amfi and Sebi did not elicit a response.

Currently, insurance agents or distributors who sell insurance products are covered under RCM. If Amfi considers the proposal, mutual fund distributors would have the same tax treatment as their insurance counterparts. However, the change would require a review by the central government.

Earlier, if a distributor received a commission of ₹100, a GST-registered distributor would treat ₹84.75 as income and remit the remaining ₹15.25 as GST to the government, while a distributor exempt from GST could retain the entire ₹100.

Under the new regime, AMCs initially pay only the base commission of ₹84.75. GST-registered distributors can recover the additional ₹15.25 by raising a GST invoice and completing compliance requirements through RTA (registrar and transfer agent) platforms, after which the amount is paid separately by the AMC and deposited with the government by the distributor. As a result, their take-home income remains unchanged at ₹84.75.

However, small distributors exempt from GST registration or operating under the composition scheme cannot recover the GST component in the same manner, resulting in a roughly 15% decline in their earnings compared with the earlier structure.

If mutual fund distribution services are brought under RCM, an AMC paying a commission of ₹100 would pay the distributor the full agreed commission, while separately remitting the applicable GST directly to the government. The distributor would not need to raise a GST invoice.

Mutual fund distribution services attract an 18% GST. Distributors with an annual turnover of up to ₹50 lakh can opt for the GST composition scheme, under which they pay a lower 6% tax on turnover but cannot issue GST tax invoices or claim input tax credit. Distributors with an annual turnover below ₹20 lakh are not required to register for GST. The weighted GST contribution by a distributor is 16.2% of their income.

The market regulator has also removed the additional 5 basis points charged as exit load.

“Commissions have gone down since the implementation of the revised TER. AMCs have also passed down some portion of the cut to exit load to distributors. Smaller distributors, who are not GST compliant have seen a larger hit than others,” said Kartik Sankaran, a mutual fund distributor with Happyness Factory, which handles assets of over ₹7,000 crore.