Mumbai, March 18 -- A new expense ratio rule from India's market regulator could cut the income of small mutual fund distributors (MFDs) by as much as a fifth, prompting an industry body to warn of an uneven playing field. In a letter dated 12 March, the Foundation of Independent Financial Associates (FIFA) asked the regulator to revisit key elements of the revised expense ratio framework, saying it is built on a flawed assumption that all distributor payouts attract 18% goods and services tax (GST). That assumption, it said, does not hold for a large part of the industry. Nearly half of India's distributor base either falls below the GST threshold or operates under the composition scheme, leading to a lower effective tax incidence. Distributors with annual turnover of up to Rs.50 lakh can opt for the composition scheme, under which they pay a lower 6% tax but cannot issue GST invoices or claim input tax credit. Those with turnover below Rs.20 lakh are not required to register for GST and do not charge the levy. FIFA said the shift to a base expense ratio (BER) that excludes statutory levies risks reducing payouts for these distributors purely due to the tax treatment. It has asked the regulator to mandate brokerage parity for exempt and composition scheme distributors so their net earnings are not hit by the move from an inclusive to an exclusive expense ratio structure. "The cost to the scheme of maintaining such parity is estimated at approximately 1-2 bps (basis points) of total AUM (assets under management), whereas the income impact on the individual small MFD is 15-20%," the industry body said in its letter. Mint reported last week that the Securities and Exchange Board of India's (Sebi) overhaul of the total expense ratio (TER) framework could significantly disrupt the mutual fund distribution landscape, particularly for smaller players who account for roughly half of the industry's Rs.81 lakh crore assets. Many of these distributors, particularly those not registered under GST, may be pushed to partner larger platforms to manage compliance and sustain operations. "A majority of the industry is not GST registered as of now," Kartik Sankaran, a mutual fund distributor with Happyness Factory, which handles assets of more than Rs.4,800 crore, had told Mint earlier. "There is a very long tail of distributors who do very few transactions in a year," he said. "A small distributor who works with 15 AMCs will have to file 15 GST returns. Platforms can help them with this as they may not have the operational capacity or capital to do the same." Under the new rules, a fund house's BER, charged to investors, must exclude statutory levies such as GST and Securities Transaction Tax. The rules come into effect from 1 April. Sebi did not immediately respond to Mint's queries....