GST Council– Providing a big relief to small mutual fund distributors, the GST council, headed by Finance Minister Arun Jaitley, has deferred the implementation of reverse charge mechanism (RCM) by another one year to September 2019.
Reverse charge is a mechanism where the recipient of the goods and/or services is liable to pay GST instead of the supplier. This is an anti-tax-evasion measure to ensure that transactions by unregistered people don’t escape tax. So, in a normal transaction, the supplier of goods or service charges the tax and pays to the government, but in this case, the responsibility reverses and falls on the buyer.
Also, the purpose of this charge is to increase tax compliance and tax revenues. Earlier, the government was unable to collect service tax from various unorganised sectors like goods transport. Compliances and tax collections will, therefore, be increased through reverse charge mechanism.
This move will benefit mutual fund distributors that have earnings of less than Rs 20 lakh a year, particularly for distributors who do not have a GST registration number or have surrendered their GST registration number.
This move will benefit mutual fund distributors that have earnings of less than Rs 20 lakh a year, particularly for distributors who do not have a GST registration number or have surrendered their GST registration number.
Out of total 46,000 MF distributors in India, only 6 percent earn above Rs 20 lakh a year.
Registered distributors are liable to pay GST on their services to the asset management companies for which they can claim input tax credit. As most of them work from small offices with computers as their only equipment, the likelihood of significant input supplies to avail credit is low.
For unregistered agents, the fund house receiving the service will pay 18 percent tax on their behalf. If RCM came into effect the fund houses would have deducted it from their commission.
“This is beneficial to small distributors who work from small offices and earn less than Rs 20 lakh per year,” said a Mumbai-based distributor.
For distributors that have already done GST registration, fund houses will continue to follow forward charge mechanism, wherein MFs will pay the gross commission to them, while these distributors will continue to avail the benefits of input credit.
The RCM was to kick in from July but got deferred by three months to September this year and now further to September 2019. The distributors’ body had recommended that the government should grant an exemption to small distributors who earn less than Rs 20 Lakh annually.