Exit load is a fee levied by Mutual Fund firms when investors redeem or sell their units before the lock-in period expires.
In a recent development, the Directorate General of Goods and Services Tax Intelligence (DGGI) has issued show-cause notices to several mutual fund (MF) companies. These notices are aimed at recovering a substantial sum as goods and service tax (GST) on exit-load charges. Sources close to the matter suggest that the sought-after amount from MF firms could surpass Rs 150 crore.
Despite the GST department’s “clarification” in 2018 that GST at 18% is applicable to exit loads, many firms have not yet complied with this directive. The latest batch of notices concerns over 100 MF schemes, with the taxman having already collected at least Rs 10 crore as some firms opted to settle the dues.
Exit load is a fee levied by MF firms when investors redeem or sell their units before the lock-in period expires. This fee is designed to dissuade investors from hastily withdrawing their funds.
For instance, if an investor bought a mutual fund on January 1, 2018, with a one-year time frame and an exit load of 1%, and then withdrew the amount before the year concluded, the 1% exit load would be applied based on the scheme’s net asset value (NAV). This fee is deducted at the time of redemption, calculated from the NAV.
The Central Board of Indirect Taxes and Customs (CBIC) had clarified in 2018 that exit loads on mutual funds are subject to GST. However, the industry argues that these charges do not pertain to any service provided to the investor, as they merely serve as a deterrent against early exits. Consequently, they contend that such charges should not fall within the ambit of GST.
With the tax authorities actively pursuing these GST claims on exit loads, mutual fund companies are now faced with the task of reassessing their tax liabilities. This development underscores the importance of adherence to GST regulations within the mutual fund sector.
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