The Directorate General of Goods and Services Tax Intelligence ( DGGI ) has reportedly issued show-cause notices to several mutual fund ( MF ) houses in an effort to recover goods and service tax ( GST ) on exit-load charges. Sources from DGGI stated that the department is aiming to recover a substantial amount of Rs 150 crore from these mutual fund companies.
In 2018, DGGI clarified that GST, at a rate of 18%, should be paid on exit loads; however, many firms have not complied with this directive. The latest batch of notices pertains to over 100 MF schemes, and the GST department has already collected at least Rs 10 crore as some firms have chosen to settle the dues, as per a report by the Financial Express.
Exit load refers to a fee imposed by MF firms on investors who redeem units before the lock-in period expires. This fee is designed to discourage premature withdrawals, ensuring fund stability and discouraging short-term investments. Investors should factor in this fee while planning their investments for optimal financial outcomes.
For instance, if an investor purchased a mutual fund on January 1, 2018, with a one-year timeframe and a 1% exit load, withdrawing before a year would result in a 1% exit load based on the scheme’s Net Asset Value ( NAV ). This fee is deducted at the time of redemption from the NAV.
The Central Board of Indirect Taxes and Customs ( CBIC ) stated in 2018 that GST is applicable to exit loads in mutual funds. However, the industry argues that these fees are not for services but are intended to discourage early exits. Consequently, they believe that these charges should not be subject to GST.
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