Posted On Monday, Mar 28, 2016
Albert Einstein, the man who explained how the universe expanded had once said, “The hardest thing in the world to understand is taxes”. And half a century later, even today, sometimes we feel we cannot agree more with his view on taxes!
VAT’s the trouble?
For consumers, the little awareness most of us have on VAT is thanks to the restaurant bill. The amount on the bill is always higher than the prices of the menu you ordered. Credit that to Service Charge, Service Tax and VAT. So what is Value Added Tax or VAT? This is a tax paid to the government every time there is a value addition in the goods or services being consumed. The chef in the kitchen adds value to the rice and vegetables to prepare the delicious Vegetable Biryani on your platter. And, therefore, the restaurant collects this VAT from you.
VAT is to be paid at every stage of value addition in the chain, as goods and/or services are being bought or sold.
Now coming to why we are discussing this tax today. Logically one might not expect mutual funds to come under VAT purview as they do not buy or sell any commodity like gold for consumption, but rather for investment purposes. However Gold Exchange Traded Funds (Gold ETFs) that invest in physical gold, like the Quantum Gold Fund ETF (Scheme), are liable to pay VAT under the Maharashtra Value Added Tax Act, 2002, because of its operations in Mumbai, Maharashtra.
VAT mechanism in gold funds
When gold funds buy gold they make VAT payment to the seller of gold. And in turn when they sell gold they collect VAT from the buyer of gold. If the VAT collected at sale is higher than the amount paid while buying, then the mutual fund is liable to pay the additional amount to the government. On the other hand if VAT collected at sale is lower than the amount paid while buying, then the mutual fund is eligible for a set off credit (which is carried forward) or a refund.
Confusing? Let’s take an illustration to understand this -
Suppose the Quantum Gold Fund ETF bought a bar of gold. The fund would sell it later on account of some investors redeeming their units. This is what the expected payments would look like:
|Particulars||Amount (in Rs.)|
|Value of 1 Gold Bar purchased||30,000|
|Value of 1 Gold Bar sold||29,000|
|VAT @ 1% paid on purchase||300|
|VAT @ 1% collected on sale value (set off claim amount)||290|
|Refund/ VAT credit||10|
The mutual fund would claim Set off / Refund while filing VAT return (just like we all file our Income Tax returns).
The twist and the resulting contention
Quantum Gold Fund ETF was launched in February, 2008. For that financial year, we received partial refunds, for which we had sought an explanation from VAT authorities as to why full refund was not considered? We are still awaiting their response till date!
However in subsequent financial years, the Sales Tax Department, Government of Maharashtra changed its view about allowing set-off on VAT, which meant that set off would be restricted, and fund houses would not receive any refunds whatsoever.
VAT authorities restricted set off based on their interpretation of certain Rules. One of these implied that set off is to be allowed only when the purchase and sale happen within a span of 6 months’ time. However, in the case of a mutual fund, sale transactions are usually lesser than purchase transactions because, gold mutual funds buy gold on behalf of their investors as Investments, for price appreciation in the long term. Mutual funds sell Gold when there is a redemption transaction. And in the normal course this does not happen within 6 months from the date of purchase which means mutual funds became ineligible for set off/refund for most of their transactions, as per the interpretation of the tax authorities.
According to VAT Rules, if receipts from the sale of gold are less than 50% of the gross receipts in a year, then set off is to be allowed only where the sale transaction occurs within 6 months of the corresponding purchase. However, the issue is that VAT authorities have clubbed the receipts of ALL schemes to arrive at gross receipts, even though these schemes do not deal in gold. For instance, suppose the Quantum Long Term Equity Fund or QLTEF sells off some holdings in a particular security, the receipts from this transaction would also be taken into account for computing gross receipts. This clubbing of schemes results in the receipts from the sale of gold fund being significantly lower than the gross receipts. However, in the Mutual Fund Industry’s and our opinion, this is an incorrect view, because all schemes are independent of each other. There is no correlation between other schemes and gold schemes; as all schemes have independent fund managers, their own investors and books of accounts which are maintained separately.
Accordingly, fund houses have been served notices by VAT authorities, disallowing set off, which is now being claimed as an outstanding liability. As a result, some fund houses started the practice of collecting additional VAT on sale transactions and depositing the same with VAT authorities, so that no future liability arises to the fund house. Your fund house too adopted this practice since August 2013, so that scheme’s investors are not adversely affected (other than market operations) and as such no further liability on account of VAT, post August 2013, will be demanded by VAT authorities
Most fund houses that are affected by these Rules have gone in for independent Appeals against the VAT authorities. Each fund house is fighting its own battle, spending in fees for legal consultation and Appeal filing. If in an Appeal and Tribunal the results are not in the mutual fund’s favor and the liability is ascertained in the Court of Law, mutual funds will have to book the said liability in the schemes immediately. This would affect returns of the gold scheme(s); and the existing unit holders would bear the impact of lower returns.
Our submission on VAT and implication for investors
Your fund house as you know, dear investor, believes in maintaining transparency in all things that can potentially affect your investments. Quantum, like other Fund Houses, has taken this matter to appeal and will take it, if needed, to the courts to decide this case. Our opinion has also been validated by an independent expert.
While this matter is still under litigation; the Trustee, the AMC Board and the Management at Quantum, including the Fund Manager, have taken the decision to pay the VAT liability and have charged it to the Scheme as on 22nd March 2016. The charges include the outstanding VAT liability for the period April 2008 to July 2013 and the interest (at applicable rates) charged on the outstanding VAT liability.
However the interest amount will not be paid till the final hearing is made. SEBI regulations do not allow debiting the penalty and fine to the scheme. However interest amount charged by VAT authorities on delay in payment of the liability is neither a penalty nor a fine. We have obtained a tax consultant’s opinion on this matter and the consultant has opined, based on multiple judgments of Supreme Court and High Court(s) that interest payments under any fiscal statue are compensatory in nature and therefore cannot be equated with penalty.
To reiterate, we did not pay the VAT liability, since we were expecting that we would be eligible for a set off (or refund) to that extent, as per the earlier interpretation.
The impact of debiting VAT and interest liability to the Scheme on 22nd March 2016 is as follows:
|Quantum Gold Fund|
|Scheme Net Assets as on 22/03/2016||Rs. 635,871,864.86|
|No. of units as on 22/03/2016||466,363|
|NAV per unit (in Rs.)||1,363.4698|
|VAT Liability for the period from April 2008 to July 2013 debited to the Scheme||Rs. 586,355|
|Interest dues till 31/03/2016 on delayed payment of VAT debited (as above) to the Scheme||Rs. 386,538|
|Total amount debited to the Scheme||Rs. 972,893|
|Scheme Net Assets as on 22/03/2016 after the above mentioned debits||Rs. 634,898,971.86|
|No. of units as on 22/03/2016||466,363|
|NAV per unit post debit of VAT liability and interest on VAT liability (in Rs.)||1,361.3837|
|Impact on NAV in %||(0.15%)|
|Impact on NAV per Unit (in Rs). (Face value Rs. 100/-)||(2.0861)|
Going forward if the courts decide in our favour we will, no doubt, credit the liability amount thus debited, back to the scheme.
Meanwhile, the Government of Maharashtra on 18th March, 2016, announced an amnesty scheme on tax payments including interest. We would, in the interest of our investors, be studying the said scheme to see its benefits without compromising our legal interpretation of the matter.
Quantum Gold Savings Fund, which invests in the units of Quantum Gold Fund ETF, holds around 91,471 units with a market value of Rs. 11.90 crores i.e. 99.82% of its Net Assets as on 22nd March, 2016. Similarly Quantum Multi Asset Fund, which invests in units of Quantum Gold Fund ETF, holds around 7,026 units with a market value of Rs.0.91 crores i.e. 12.95 % of its Net Assets as on 22nd March 2016. The value of the units of these schemes is determined by factors which include market demand and supply of the units and the NAV of the units of the underlying schemes, which includes Quantum Gold Fund ETF.
All said and done, whatever the case, as we wait for the outcome of our legal proceedings, we’d like to assure our investors that Quantum will do whatever it rightfully can, to address your best interests and will manage your hard earned savings entrusted to us with utmost integrity and prudence.
|Name of the Scheme & Primary Benchmark||This product is suitable for investors who are seeking*||Risk-o-meter of Scheme|
|Quantum Gold Fund |
An Open Ended Scheme Replicating / Tracking Gold
|• Long term returns |
• Investments in physical gold.
Investors understand that their principal will be at Moderately High Risk
|Quantum Gold Savings Fund |
An Open Ended Fund of Fund Scheme Investing in Quantum Gold Fund
|• Long term returns|
•Investments in units of Quantum Gold Fund - Exchange Traded Fund whose underlying investments are in physical gold.
Investors understand that their principal will be at Moderately High Risk
|Quantum Multi Asset Fund of Funds |
(An Open Ended Fund of Funds Scheme Investing in schemes of Quantum Mutual Fund)
|• Long term capital appreciation and current income |
• Investments in portfolio of schemes of Quantum Mutual Fund whose underlying investments are in equity , debt / money market instruments and gold
Investors understand that their principal will be at Moderately High Risk<
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
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