3 Ways GST will Impact on Financial Advisors

The path-breaking historic law named Goods & Services Tax (GST) is now a reality in India. A lot has been written about this tax over the last 1-2 years regarding its formulation, difficulties faced in getting the law ready and finally its impact on the Indian businesses and consumers. While GST is expected to bring down the cascading effect of multiple tax levies on various goods in the country, whether the unification of various taxes under GST will help bring down prices of goods and services is debatable.

Impact on Financial Services

As among other sectors, GST has a direct impact on financial services too. All the financial services including services by Mutual Funds, Insurance Companies, Broking companies, Banks are covered under the ambit of GST. While all these services were already covered under the ambit of service tax too, the GST impact is restricted to the revision of rates of taxes on the services. The GST rate of 18% is applicable on these services as compared to the lower rate of 15% under service tax. For retail consumers of these services, it implies a higher outgo on account of the rate revision in terms of the total cost of the financial transaction. The gross cost of transactions such equity share brokerage plus GST, Demat annual charges plus GST, chargeable bank services plus GST, loan processing fees plus GST has the potential to burn a bigger hole in the end-consumers pockets, who are mere consumers of these services and are not using these services to further any business. Insurance premiums including the medical and other indemnity policies will see a hike in the total premium outgo due to the 3% differential rate as discussed above. Likewise, term plan premiums and the applicable charges on investment-linked life insurance policies will also bear the additional 3% GST.

Impact on Financial Advisors

1. Registration

The GST will also have a direct impact on financial advisors and their compliances. GST law has defined the minimum threshold limit of Rs.20 lakhs in terms of annual turnover to qualify for registration under the Act. All financial advisors whose annual commission/ fee income is expected to cross Rs. 20 lakhs will need to be registered under GST and comply with the requirements therein. For advisors with lower than specified annual incomes, will have a choice to continue to operate as unregistered dealers.

Unregistered distributors/ agents

The prescribed threshold does not imply that the unregistered distributors (Mutual Funds) and agents (insurance) do not have to pay GST. The Mutual Fund companies and insurance companies are required to pay GST under the Reverse charge mechanism (RCM) from the commissions paid to distributors and agents. In the case of unregistered distributors and agents, the companies would deduct the GST liability due from the gross commission and pay out the net amount to the distributors, which is similar to the practice followed under the Service Tax regime. This implies that the impact of GST on distributors would be to the extent of the increase in the GST rate applicable on commissions.

On the contrary, if the distributor gets himself registered (voluntary registration is permitted under the GST law even if the annual income is less than the prescribed threshold), the company would pay the gross commission and it would be the distributor’s obligation to comply with the taxes. If the distributor avails a variety of services and goods in the course of their business then as a registered dealer, he/ she is entitled to set-off the input GST paid against the GST payable on their services. An unregistered distributor, although paying GST under RCM, would not be in a position to claim these credits. Practically, it can be implied that it is mandatory for registration under GST laws for distributors, irrespective of their turnover.

Insurance agents have a limited choice when it comes to paying GST or claiming credits. The GST payable on insurance commissions are squarely covered under the RCM, while this absolves the agents from registering under the law, it also prevents them from claiming any credits on GST paid on goods and services availed.

For investment advisors, who charge professional fees from clients, will now have to recover 18% GST from their clients in addition to their fees, which could make their services dearer to the clients.

2. Payment of GST under reverse charge

Registered distributors have to take special attention when dealing with unregistered dealers during the course of their business. Under the provisions of the GST law, if a registered distributor buys/purchases goods and services from unregistered persons, then the applicable GST on the purchase amount has to be paid by the registered person. This provision puts the onus on the registered person to deal only with registered persons or in the other case, to pay the GST out of their own pockets. The credit of GST so paid can be claimed against the output GST liability.

Most commonly used services by distributors in the course of their business like office rentals, house-keeping services, computer maintenance, office stationery and similar expenses are typical examples where the registered distributor may be required to pay GST under reverse charge.

Keeping practical issues in mind, the Government has provided a daily limit of Rs. 5,000 for dealing with unregistered persons, where the RCM provisions need not have complied.

3. Monthly Compliances

All registered distributors are required to file three types of returns every month – the 1^st return is in relation to income, 2^nd return relates to the purchases made and the 3^rd return for the computation of net liability for the month. This totals up to 37 returns per year (including one annual return) with an additional audit triggered if the turnover exceeds the specified limit (at Rs. 2 crores). In addition, registered distributors and advisors would also be required to upload invoices into the GST system, which may prove to be a cumbersome exercise.

To sum up, there would be an increased cost of compliance for all financial advisors under GST, especially for advisors who operate out of multiple cities / States. Multiple presences imply registration for each State followed by the same basic set of compliances as listed in the preceding paragraphs for each State. Imagine an advisor having the presence in 3 states would be required to file approx.111 returns per year for his business activity. These factors could prove to be an entry-barrier for small advisors/ distributors especially as the commissions have been moving south.

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