Mutual fund distribution and advisory services should be exempt from GST, says Abhinav Angirish

By Abhinav Angirish

Indian mutual fund industry has witnessed smart growth in the past decade. There is enough room for the growth of the industry because mutual fund penetration in India is just 3% of the population. The government has an excellent opportunity to roll out investor-friendly measures which will help in channelizing savings in a mutual fund.

AMFI, the apex body for mutual funds is making all-out efforts to create awareness among small investors. Financial advisers have played an important role in reaching out to small investors. They have played an important role in increasing mutual fund penetration. This is not all, many advisory firms are investing huge amount in online infrastructure to expand their reach and efficiently facilitate transactions. Presently distribution and advisory services attract 18% GST. Mutual fund distribution and advisory services should be exempt from GST or the tax-rate should be brought down to minimum. This will encourage innovation in mutual fund distribution and advisory services.

Traditional instruments like fixed deposit are losing their sheen. The introduction of Debt Linked Savings Scheme (DLSS) can encourage investor’s participation in the debt market. DLSS can have a lock-in period of five years to avail tax benefits. DLSS will bring debt investors on par with National Pension Scheme as far as tax treatment is concerned. DLSS can be a game-changer, a win-win situation for investor and the government. Investors get a chance to earn higher returns compared to traditional instruments. While the government can channelize the investments to boost infrastructure.

To encourage greater investor participation, investment process needs to be streamlined. Presently, if the investor wants to switch the fund, he has to sell his fund and invest the proceeds in other funds. This attracts Short Term Capital Gains (STCG). The government should facilitate switching between different fund houses in the same category without attracting STCG. Such a bold move could see an influx of new investors and also put pressure on under-performing fund managers to perform better. There is a need to overhaul the existing KYC process too. Presently, every institution, whether AMC, bank or adviser, has to ensure individual KYC of the investor. This becomes very cumbersome for the individual investor. There must be common FATCA/KYC which can be accessed by all market intermediaries. This will simplify the investment process and make it faster.

The mutual fund industry has a long-standing demand to reduce Dividend Distribution Tax (DDT). Presently, debt funds attract DDT at the rate of 25%, this should be lowered to 22%. This will encourage small investors to invest aggressively in debt funds. Higher participation of retail investors can help to take the economy on the next level. The relaxation in debt funds can help to deepen the bond market and ensure more funds are available to the government which in turn can be used to boost the economy. At this juncture, the Indian economy requires a big push to attract investment in infrastructure.

Indian tax structure is complex. Instead of following a tax-slab-based system, uniform tax should be introduced. For example, without tinkering the tax-slab below Rs 5 lakh, anyone having the annual income of more than 5 lakh pays 20% flat tax-rate with no exemption whatsoever. If this happens, it will provide a huge boost to consumption and arrest slow-down worries that have been looming large over the past few quarters.

(The writer is the founder of Investonline.in)