Under the scanner: Clutch of fund houses in a spot over tax credit claims

The Directorate General of Goods and Services Tax Intelligence (DGGI) is probing 7-8 mutual fund houses based in Mumbai and Kolkata for allegedly wrongfully claiming and availing of input tax credit during 2017-18 by showing cost allocation (based on the respective scheme) as capital expenditure in their books.

Notably, all the expenses incurred by an asset management company (AMC), including payments to channel partners/distributors, are capped at 2.25 per cent of AUM. But, in certain cases, tax credit claimed on expenses was much higher than the prescribed limit, in a bid to reduce their GST liability, said two official privy to the probe.

“In the past two-three months, the DGGI enquired about expenses claimed in the books of these AMCs, services rendered by distributors and related evidence, and contract details with distributors. It has also recorded statements of some of the online players facilitating buying and selling of MFs schemes,” one of the two officials said.

According to officials, the department initiated the probe early this year and because of complexities in the case, it required a detailed assessment. The final report is expected to be prepared within a month and accordingly, show-cause notices will be issued, the sources said.

Though the exact quantum of “wrongfully” claimed tax credit is not yet known, an estimate indicates that it can be 0.5 per cent of total AUM of the MF industry. The tax liability may be between Rs 500 crore and Rs 1,000 crore.

Investigators, according to the sources, are also looking into whether distributors were involved in raising bogus invoices to facilitate these fund houses and whether the practice still continues.

“The expenses incurred in procuring and managing an AMC business are admissible as inputs without cap under GST,” said Bipin Sapra, partner, EY India.

“A dispute can occur on the nature of these supplies depending on individual facts,” he added.

This matter may lead to disallowance of input tax credit and the erring AMCs may be asked to pay additional tax, along with interest, a source said.

The fund houses under the scanner will now have to justify the genuineness of the claimed credit based on the nature, extent and quantum of services rendered.

“It is essential to clarify on the ITC issues faced by certain MFs as any confusion on GST matters has a deep impact on profitability and business. While it is necessary to keep overall expenses within the prescribed regulatory cap, a leeway regarding the various elements of distribution commission is essential,” said M S Mani, partner, Deloitte India.

There are Securities and Exchange Board of India (Sebi)-defined limits on expenses incurred for MF schemes. Sebi wants everything to be clubbed within the total expense ratio (TER). “GST cannot be charged on a scheme over and above the TER. Brokerage transaction expenses (portfolio investments) cannot be borne by AMCs. A formal circular may be issued by Sebi on the matter,” said Joydeep Sen, an independent MF expert.

Under the scanner

> Fund houses in focus are based in Mumbai, Kolkata

> Tax liability may be between Rs 500 cr and Rs 1,000 cr

>DGGI alleges tax credit claimed on expenses was much higher than prescribed limit

> Final probe report expected within a month; show-cause notices to be issued subsequently