Please note that Sub-Brokership and service as an authorized person to a member of a commodity exchange is not covered under negative list, instead it is covered under Mega Exemption notification 25/2012 dt 20-06-12.
Hence, one need to first get registered for the services it is providing and then claim exemption thereon.
Self explanatory Note-
A registered Sub-Broker or an authorized person being a service provider is providing service to a registered stock broker,
An authorized person being a service provider is providing service to a member of a commodity exchange AND
A Mutual Fund Agent being a service provider is providing service to a Mutual Fund or Asset management company,
Then the above mentioned providers of services are exempted from service tax liability vide Mega Exemption Notification25/2012-ST dated 20-06-2012.
Services by some of following intermediaries are exempt from service tax: (illustrative list)
A. sub-broker or an authorized person to a stock broker;
B. authorized person to a member of a commodity exchange;
C. mutual fund agent to a mutual fund or asset management company;
D. distributor to a mutual fund or asset management company;
Please also note Trading of Goods is not covered under definition of service.
Some general question which would come in minds of sub-brokers are:
Issue 1 - Would forward contracts in commodities be covered under trading of goods?
Forward contracts would be covered under trading of goods as these are contracts which involve transfer of title in goods on a future date at a pre-determined price.
Hence Not taxable.
Issue 2 - Would commodity futures be covered under trading of goods?
Ans: In commodity futures actual delivery of goods does not normally take place and the purchaser under a futures contract normally offset all obligations or closes out by selling an equal quantity of goods of the same description under another contract for delivery on the same date. These are in the nature of derivatives.
Hence Not taxable
Issue 3 - Would auxiliary services relating to future contracts or commodity futures be covered in the negative list entry relating to trading of goods?
Such services provided by commodity exchanges clearing houses or agents would not be covered in the negative list entry relating to trading of goods.
Issue 4 - Would ‘future contracts’ be chargeable to Service tax?
Future contracts are in the nature of financial derivatives price of which is depended on the value of underlying stocks or index of stocks or certain approved currencies and the settlement happens normally by way of net settlement with no actual delivery.
Since future contracts are in the nature of contracts of difference based on the prices of underlying stocks or index of stocks or approved currencies, they would be outside to the ambit of definition of ‘service’ as being transactions only in transfer of title in derivatives.
Hence not taxable.
Issue 6 - Would buying or selling of mutual funds or debentures be a ‘service’?
Buying or selling of mutual funds or debentures would not be a service as the same would be a transaction in securities.
Hence Not taxable
Issue 8 - Whether the service tax would be chargeable on the ‘entry and exit load’ amount charged by a mutual fund to the investor?
Ans. As per the definition of ‘service’ only activities which are in the nature of transfer of title in goods (which includes securities) are excluded. As a consideration for the transfer of title in mutual funds the investors pay amounts equal to NAV of the mutual fund. Entry or exit loads are in the nature of consideration for documentation, covering initial expenses, asset management etc.
Hence service tax would be leviable on such entry and exit loads.
Securities have been included as goods
Securities have been defined in section 65B of the Act as having the same meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956 (42 0f 1956) in terms of which ‘securities’ includes
• 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.
• 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.
• Units or any other such instrument issued to the investors under any mutual fund scheme.
• Any certificate or instrument (by whichever name called), issued to any investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;
• Government securities;
• Such other instruments as may be declared by the Central Government to be securities.
• Rights or interest in securities.
Now the question arises as to what are the implications of inclusion of ‘securities’ as ‘goods’?
Ans: The definition of ‘goods’ has essentially been borrowed from the Sale of Goods Act, 1930 with the only variation that in the inclusion clause of the said definition the phrase ‘stocks and shares’ been replaced with ‘securities’. In effect, therefore, activities that are in the nature of only transfer of title by way of sale, redemption, purchase or acquisition of securities on principal-to-principal basis, excluding services of dealers, brokers or agents in relation to such transactions, are outside the ambit of ‘services.
However activities which are not in the nature of transfer of title in securities (for example a person agreeing not to exercise his right in a security for a given period of time for a consideration) would not be included in this exclusion clause to the definition of ‘service.
Activities that constitute only transactions in ‘goods’ are also excluded from the definition of service. ‘Goods’ have been defined in clause (25) of section 65 B to include ‘securities’.
Definition of ‘securities include ‘derivatives’.
Transactions in instruments like interest rate swaps and foreign exchange swaps would be excluded from the definition of ‘service’ as such instruments are derivatives, being securities, based on contracts of difference.
Since only transfer of title in securities is excluded from the definition of ‘service’ any attendant service charges or fees would be chargeable to service tax.
What is a derivative?
As per in clause (ac) of section 2 of the Securities Contract (Regulation) Act, 1956 (42 0f 1956) “derivative” includes—
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities.
The definition of ‘derivatives’ in the said Act is an inclusive definition. Moreover, it may be noticed that as per the said definition ‘derivative’ includes security derived from a ‘contract of difference’ which is of a very wide ambit. It would thus be prudent to keep in mind definition of derivatives as contained in Clause (a) of Section 45U of the RBI Act, 1935 as per which a ‘derivates’ means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating from credit index, price of securities (also called “underlying”) , or a combination of a more than one of them and includes interest rates swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency–rupee options or such other instruments as may be specified by the Bank from time-to- time. Transactions, including over the counter transactions, in such securities would therefore be out of the ambit of definition of ‘service’.
However if some service charges or service fees or documentation fees or broking charges or such like fees or charges are charged, the same would be considerations for provision of service and chargeable to service tax.
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