GST show-cause notices sent to mutual fund houses on exit-load charges: Report

The Directorate General of Goods and Services Tax Intelligence (DGGI) has reportedly sent show-cause notices to some mutual fund (MF) houses in a bod to recover goods and service tax (GST) on exit-load charges. DGGI sources said the department is chasing to recover a whopping amount of Rs 150 crore from these mutual fund companies.

The DGGI in 2018 had clarified that GST must be paid at 18% on exit load, most firms haven’t complied with the directive. The current set of notices are with respect to over 100 MF schemes, and at least Rs 10 crore has already been collected by the GST department as a few firms have opted to pay up, the Financial Express reported.

Exit load is a fee imposed by MF firms on investors redeeming units before the lock-in period ends. This cost aims to deter hasty withdrawals. It helps maintain fund stability and discourages short-term investments. Investors should consider this fee when planning their investments for better financial outcomes.

If an investor bought a mutual fund on January 1, 2018, with a one-year timeframe and a 1% exit load, withdrawing before a year would incur a 1% exit load based on the scheme's NAV. The fee is deducted at redemption from the NAV.

CBIC stated in 2018 that GST applies to exit loads in mutual funds. The industry argues that these fees aren't for services but to deter early exits. They believe these charges shouldn't be subject to GST.