Turnover charges, regulator fee and demat charges to come under the service tax net. Stock brokers will now have to pay more service tax. The Central Board of Excise & Customs (CBEC) has clarified that
- turnover charges,
- exchange transaction charges,
- dematerialisation charges and
- regulator fees
recovered by brokers from clients will be added to the brokerage amount while calculating the tax. The stamp duty and securities transaction tax would be kept out of the taxable amount, it said. Most brokers collect service tax only on brokerage charges and not on many statutory levies like the Securities and Exchange Board of India (Sebi) fees or stock exchange transaction charges, considering that these are levies required to be paid to remain in business. Earlier this year, in Gujarat, the service tax department told brokers to pay service tax on the charges mentioned above. The CBEC circular is a clarification and, hence, silent on the effective date. Service tax departments can demand arrears for the past five years. Shailesh Sheth, a service tax expert, said: “Inclusion of statutory charges for calculation of service tax is debatable and, in any case, should not be with retrospective effect.” He cited several tribunal judgements that transaction charges, handling charges, terminal charges, etc, could not be included in the taxable value for determining service tax.
New demand notices
After the circular, all state service tax departments are expected to issue demand notices to stock brokers. Last year, the National Stock Exchange and the Bombay Stock Exchange collected Rs 1,000 crore transaction charges from brokers, which means an additional Rs 100 crore service tax from this account alone. If added to other charges on which brokers are not collecting service tax, the figure could be much higher. Only a handful of large brokerage houses collect service tax on all other charges. If the department asks for the additional tax, brokers will have to pay, irrespective of whether the tax was collected from the clients or not. Since the issue became controversial after differences of opinion within the department in the western zone, the matter was referred to CBEC for clarification.
In September, CBEC issued an internal circular, which was made public a few days ago, saying only the stamp duty and securities transaction tax were the liability of the buyer/seller of securities and the broker pays these while acting purely as an agent (collecting such charges from clients on behalf of the revenue department). So, these are not included in the service tax amount. The board has now ruled that the gross amount received as consideration for provision of service should be considered. It shall include expenditure or costs incurred by the service provider in the course of providing the service, even if the various costs are separately indicated in the invoice or bill issued by the service provider to his client.