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GST and your personal finances

Author: Arvind Rao/Thursday, August 3, 2017/Categories: Cover Feature, Invest, Expert View

GST and your personal finances

The path-breaking historic law named Goods & Services Tax (GST) is now a reality. A lot has been written about this tax over the past 1-2 years regarding its formulation, difficulties in its passage and finally its impact on businesses and consumers. While GST is expected to bring down the cascading effect of multiple tax levies on various goods and services, the jury is still out on whether a single tax will reduce prices of goods and services.

GST and financial services

As among other sectors, GST directly impacts the entire set of financial services players too, including mutual funds, insurance companies, brokerages, banks, etc, which are now subject to a tax rate of 18% as opposed to a service tax of 15% earlier.

For retail consumers, the GST rate thus implies a higher outgo in terms of the total cost of a financial transaction. The gross cost of transactions when you add the GST to equity share brokerage, demat annual charges, bank service charges or loan processing fees will burn a bigger hole in the end-consumer’s pockets, who do not use these services to further any business. Insurance premiums including mediclaim and other indemnity policies will see a hike in the total premium outgo due to the 3% differential rate as discussed above. Like-wise, term plan premiums and the applicable charges on investment-linked life insurance policies will also bear a higher tax bill (See table below).

Service availed

Base cost

Cost incl. service tax

 

Cost incl. GST

Term plan premiums for self

15,000

17,250

17,700

Mediclaim premiums for family

18,000

20,700

21,240

Endowment policy premiums (first year)

25,000

26,125

25,938

Annual Locker rent

1,000

1,015

1,018

Loan processing fees

20,000

23,000

23,600

Tax Return filing fees

5,000

5,750

5,900

Financial planner fees

20,000

23,000

23,600

 

 

 

 

 

Impact on financial advisors

  1. Registration

The GST will also affect financial advisors and their compliances. The GST law has defined the minimum threshold limit of Rs 20 lakh in terms of annual turnover for financial advisors to qualify for registration under the Act and comply with the requirements therein. 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. Mutual Fund AMCs and insurance companies are required to pay GST under the Reverse charge mechanism (RCM) from the commissions paid to distributors and agents. In 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 distributors, which is similar to the practice followed under the earlier 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 a 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 the services they offer.

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 is 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.

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

  1. Payment of GST under reverse charge

Registered distributors have to take special attention while dealing with unregistered dealers during the course of their business. Under the provisions of 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.

The most common services used by distributors include office rentals, house-keeping services, computer maintenance, stationery and similar expenses, 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 be complied with.  

  1. Monthly compliances

All registered distributors are required to file three types of returns every month – the 1st return is in relation to income, 2nd return relates to the purchases made and the 3rd return for the computation of net liability for the month. This totals upto 37 returns per year (including one annual return) with an additional audit triggered if the turnover exceeds the specified limit (of Rs 2 crore). Moreover, 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, the cost of compliance would go up for all financial advisors under GST, especially for those who operate out of multiple cities / states. Multiple presence implies registration for each state followed by the same basic set of compliances as listed above, for each state. Imagine an advisor operating in three states would be required to file almost 111 returns per year for his business activities. These factors could prove to be an entry-barrier for small advisors/ distributors especially as the commissions have been moving south.

The author is proprietor at Arvind Rao & Associates, a Mumbai-based chartered accountancy firm.

 

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