Stock brokers are last chain in investment cycle of an economy catering to the investors wanting to invest in financial markets through a stock exchange. Goods and Services Tax (GST) is introduced in the nation from 1st July 2017 seeks to levy tax on supply of stock broking service by a stock broker. The all encompassing definition of ‘supply’ covers service provided by the stock broker. However, ‘securities’ are excluded from the definition of goods or services. Thus, service provided in relation to ‘security’ only is covered within the ambit of GST.
The definition of ‘securities’ under ‘The Security and Exchange Control Act’ is as follows:
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(id) units or any other such instrument issued to the investors under any mutual fund scheme;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interest in securities;
Stock brokers dealing in all these securities are covered under GST. All are aware that service tax levied while Finance Act, 1994 included service tax on stock broking service. The provisions of GST under Central Goods and Services Tax Act (CGST), State Goods and Services Tax Act (SGST) Union Territory and Services Tax Act (UTGST) and Integrated Goods and Service Tax Act (IGST) are more or less in line with the provisions of Finance Act, 1994, so far as services of main stock broker is concerned. However, in a security transaction on stock exchange, other intermediaries like Sub-Brokers, Authorised Persons, Remisers are also involved. In the service tax regime, service tax liability was required to be discharged by the main broker and other intermediaries were not liable to pay service tax. GST being destination based tax on the foundation of input tax credit at every stage, covers all intermediaries in the transaction of securities. So far as the main brokers are concerned, there is no difference in the leviability of tax under GST except the change in rate of tax (15% aggregate in service tax and 18% in GST) and availment of input tax credit at every stage in the chain of purchase or sale of securities.
However, marked difference to the levy of service tax and GST is that unlike service tax, interest, late fee, penalty for delayed payment of consideration is also liable to GST. This means that in case of any delayed payment from a purchaser of security for which interest is levied by the broker, the same shall be subject to GST. The rate of tax on interest shall be the same in case of stock broking i.e. 18% IGST or 9% CGST & 9% SGST.
In terms of provisions of Section 2(13) of the IGST Act, 2017 Intermediary means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account
Thus, a Broker, Sub-Broker Authorised Person, Remiser, Network Partner is an intermediary or negotiator in the contracting of any type of bargain, acting as an agent for parties who wish to buy or sell stocks, bonds, real or personal property, commodities, or services.
Valuation of stock broker’s service under GST
Service tax was leviable on brokerage, transaction charges and taxes levied by SEBI. S. 15 of CGST Act deals with valuation of a transaction. As per the provisions of S. 15 any taxes, duties, cesses, fees, charges levied under any law for the time being in force is included for the purpose of valuation. Thus, in addition to brokerage, GST is leviable on various charges collected by the stock broker. However, it may be possible to deduct such charges from the valuation if they are recovered on actual basis and the conditions of ‘pure agent’ as mentioned in Determination of Value of Supply Rules are met.
Sometime stock broker provide service of giving tips by way of morning calls by sms or otherwise. All such services if for a consideration shall be liable to GST
Place of Supply
GST is a destination based consumption tax. The place of supply in the context of stock broker assumes utmost importance. In service tax the place of business of stock broker determined the place of taxation, under the GST law, if supply of service is made to a registered person, the location of such person as exists on record shall determine the nature of tax to be levied. If location of recipient is not available on record of stock broker then the location of supplier would be relevant. When a stock broker purchases or sells a security, he has the address of the recipient on record. Now it is mandatory to register KYC norms for any individual investor or trader. Thus, when a stock broker issues bill or invoice he has full name and address of the recipient. If a Mumbai based stock broker issues invoice to an investor or trader in Maharashtra, he will have to charge and pay CGST and SGST to such investor. However, if the same stock broker issues invoice to an investor / trader outside the State, he will have to charge and pay IGST.
This leads to an interesting situation if the stock broking service is provided to a non-resident or foreign entity like FII. If such FII is registered in India, the State in which it is registered will determine the place of supply. If the State in which the stock broker located and FII registered is same, CGST and SGST of that State will apply. If the place of location of both the parties is in different State, IGST will be levied. However, in case FII has no place of business in India, GST in the State of location of stock broker shall apply and IGST will be applicable. There has been no change in the place of supply of intermediary service from the earlier service tax regime when either the location of supplier or recipient is outside India. In such a case, place of location of intermediary is determinative.
Input Tax Credit (ITC) in the hands of stock broker
A stock broker is allowed input tax credit of goods, services and capital goods used or intended to be used in the course or in furtherance of his business and the amount of such ITC shall be credited to his Electronic Credit Ledger. Conditions for availment of input credits are in general applicable in all cases and hence not discussed here specifically. Credits of motor vehicles and other conveyances, food & beverages, membership of club, health and fitness services, rent-a-cab, life insurance, health insurance are not allowed. Input tax credit of capital goods includes GST paid on purchase of air-conditioners, computers and other electronic gadgets are allowed subject to they being shown as capital assets in the books of accounts. Further, input tax credit of rent paid for use of commercial premises for the purpose of stock broking business is allowable.
Goods or services used partly for business and partly for other purpose shall be allowed proportionately as attributable to the business purpose. However, when a stock broker undertakes proprietary trading in securities, the input tax credit in the proportion in the value of securities traded for earning the brokerage business shall be allowed in proportion of such value to the total value of securities transacted. This is because transaction in security is outside the ambit of GST.
If a stock broker having office at different States he will be required to take registration in all those States. Input tax credits arising in those States will have to be used for discharging the liability in those States. However, in case of overflow of such credit in a particular State the same can be transferred to another State of his operation if such credit is used for providing service from such another State. Such credit can be transferred by cross charging the office in other State using the mechanism of charging IGST.
If a stock broker is holding investors seminar in another State, he will need to take registration as Casual Taxable Person in that State to avail input tax credit of the hotel, convention hall etc. as such hotel will charge CGST & SGST of that State and the input tax credit will have to be transferred by cross charging the office in other State using the mechanism of charging IGST.
In case of services of Network Partner outside the State, input tax credit should be allowed on the basis of IGST charged in his invoice.
Earlier, the sub-brokers, agents etc were not required to register and discharge liability of service tax as the main broker was liable to do the same. However, under GST agents/sub-brokers, Authorised Persons, Remisers etc are liable to get themselves registered due to provision of compulsory registration as enrished in The Central Goods and Services Tax Act, 2017. CGST Act provides that any person who make taxable supply of goods or services or both on behalf of other taxable persons whether as an agent or otherwise will have to take registration. The threshold limit of registration is aggregate turnover of ₹ 20 lakhs for other than Special Category States like Arunachal Pradesh, Assam, Nagaland, Manipur, Himachal Pradesh, Sikkim and Jammu & Kashmir. In case f these States the aggregate turnover is ₹ 10 lakhs. Further, aggregate turnover will define as aggregate value of all taxable supplies including exempt supplies, exports and inter-state supplies having same permanent account number to be computed on all India basis but excluding CGST, SGST, UTGST & IGST. However, inward supplies on which tax is payable on reverse charge basis are not to be included for the purpose of computing aggregate turnover.
If a sub-broker etc. is not registered, the main broker is liable to pay GST on reverse charge basis for commission paid to sub-broker/ franchisee. Main broker paying commission to the sub-broker or authorised person etc. shall have to issue debit note on month on month basis for claim of input tax credit.
Once registered, a stock broker will have to observe all compliances under GST including issue of invoice, payment of tax, filing of monthly returns, invoice matching, record maintenance, annual audit in case of turnover above ₹ 2 crore in a financial year etc. Further, he will be required to pay GST on purchases from unregistered dealers above ₹ 5,000/- per day in aggregation of all premises registered under same permanent account number. The registered person can take input tax credit of GST paid on purchase from unregistered dealer by issuing self invoice and uploading the same in GSTN.
Rate of tax
Stock broking service falls under the general description of the rate schedule called as ‘other services’ under Chapter Heading Number 9997.
GST in general and particularly on stock broker service will streamline the entire process of services of trading of securities by all intermediaries from main broker to sub-brokers, authorised persons, remisers, network partners. With availment of input tax credit it is expected to bring financial discipline in the financial market.