Effective: 01st April 2026
A significant operational reform has been introduced from April 2026, requiring Mutual Fund Distributors (MFDs) to receive brokerage exclusive of GST across all schemes. This move aims to enhance transparency and ensure proper GST compliance within the mutual fund ecosystem.
A. Background:
- TER Ratio –
TER is the annual cost charged by a mutual fund to manage your investment. It is expressed as a percentage of the fund’s average assets.
It includes:
- Fund management fees
- Registrar & transfer agent (RTA) fees
- Distributor commission (brokerage to MFDs)
- Administrative & operating expenses
Trigger for Change: This follows SEBI’s announcement in 2025 to separate statutory levies (GST, STT) from the Total Expense Ratio (TER), improving transparency.
The new TER regulations, which will come into effect from April 1, 2026, could have unintended but significant implications for a majority of mutual fund distributors.
2. GST Position of MFDs
MFDs have long faced ambiguity under GST laws regarding their classification and tax obligations:
- MFDs are often treated as Brokers / Intermediaries / Agents
- As per interpretations under the CGST Act, 2017:
- Threshold limit of ₹20,00,000 is not applicable to Brokers
- This has led to:
- GST notices issued to certain MFDs requiring registration and tax payment from ₹1 onwards considering MFDs as “Brokers”
- Key unresolved questions even after 1st April 2026:
- Applicability of Composition Scheme
- Whether such scheme is optional or automatically applicable within thresholds.
B. Understanding the Change in Brokerage & GST Treatment
- Applicability
- Effective for:
- All new assets procured on or after 01 April 2026
- All existing assets, irrespective of investment year (2024, 2025, etc.)
- Brokerage paid after April 2026 will follow the revised structure.
2. Earlier Practice – GST Included in Brokerage
- Brokerage was quoted as a single inclusive rate
- Example:
- Brokerage: 18% (inclusive of GST)
- If payout = ₹1,00,000 → GST was embedded within this amount
Impact:
- MFDs received full brokerage including GST
- No distinction between GST-registered and unregistered MFDs
3. Revised Practice – GST Charged Separately
From April 2026:
- Brokerage will be exclusive of GST
- GST will be calculated separately using:
Formula:
GST = Existing Rate × 18 / 118
Illustration (₹1,00,000 Brokerage)
– For GST-Registered MFDs:
- GST component: ₹15,255
- Amount released initially: ₹84,745
- GST amount is withheld until compliance is confirmed
– For Non-GST Registered MFDs:
- Amount released: ₹84,745
- GST portion is not paid
C. Process to Claim Withheld GST (For Registered MFDs)
RTA (Registrar and Transfer Agent) manages this process on behalf of AMCs.
Steps:
- Brokerage paid excluding GST
- GST portion kept on hold by RTA
- Submit GST proof on RTA portal:
- GST payment summary
- Invoice details (Excel format)
- Submission Timeline:
- Submit by 20th of the month
- RTA forwards request to AMC
- Delays shift processing to next cycle
- AMC verifies and releases GST payout
D. Conclusion –
Considering this as one of the most significant reforms in GST implementation, it is imperative to proactively realign business practices and compliance frameworks. Key action points include:
- Unregistered MFDs should evaluate the necessity of obtaining GST registration, optimize their Input Tax Credit (ITC) mechanisms, and assess the feasibility of opting for the Composition Scheme (subject to further clarity and discussions).
- MFDs operating with multiple ARNs should consider restructuring operations under a single ARN, preferably through a Private Limited Company, to ensure greater transparency, operational efficiency, and better succession planning.
- Registered MFDs must revisit their GST compliance approach, aligning with the revised procedures, documentation requirements, and reporting standards under the new framework.
Regards,
CA Sachin Rokade and Sakshi Mandke
JAGR & Co. Chartered Accountants LLP – www.jagrcallp.com