Is GST leviable on reimbursement of delayed payment for purchase of securities?
Under GST, Supply is considered a taxable event for charging tax. The liability to pay tax arises at the time of supply of goods or services. Thus, determining whether or not a transaction falls under the meaning of supply is important to decide GST’s applicability. The GST council has fitted over 1300 goods and 500 services under four tax slabs of 5%, 12%, 18% and 28% under GST. Certain supplies are covered under Notification No.12/2017- Central Tax (Rate) Dated 28-06-2017 are exempted from the levy of GST (i.e., no GST will be charged on such supplies).
According to Entry 27 of the above notification, Services by way of-
- Extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services);
- Inter se sale or purchase of foreign currency amongst banks or authorized dealers of foreign exchange or amongst banks and such dealers.
Are exempt from GST
Let us refer to the AAAR ruling of SPFL Securities Ltd where the question raised was whether GST is liable to be paid on delayed payment charges recovered from the client towards trading of securities upon payment made by them beyond the time stipulated by the stock exchange and SEBI and for which payment is deducted by the stock exchange from the broker’s account or not
Profile of the Applicant
M/s SPFL Securities Limited was a registered assessee under GST engaged primarily in the business of providing service of stock broking i.e., purchasing and selling of shares on behalf of the clients on exchange platform by virtue of being a recognized BSE/NSE appointed stock broker.
Application for Advance Ruling
- The Applicant submitted application for Advance Ruling with an issue of taxability on delayed payment charges on reimbursement of amount by client to Applicant, where client failed to pay amount paid to Stock Exchanges for purchase of securities with T+1 (trading day plus one day) under SEBI Regulation norms and deducted by Stock Exchanges from Applicant Account being purchase consideration of securities which was neither good nor service under GST.
- Authority for Advance Ruling (AAR) ruled that applicant was liable to pay GST on the Delayed payment of charges which are overdue from the client towards trading of securities and reimbursed to them.’
- Being aggrieved with the order, applicant filed appeal application before the Appellate Authority of Advance Ruling (AAAR)
Submissions by Applicant
- Applicant submitted that the issue related to late payment charge towards amount remaining unfulfilled within (T+1) norms provided by stock exchange.
- Their contention was that the said charges were not on the account of stock broking activity on which due tax liability was discharged, in fact it was on amount remaining un-fulfilled (short paid) at the time of initial purchase of stock between stock broker and client within the stipulated time i.e., (T+1).
- His contentions were the transaction between him and his client was outside GST. Therefore, if the principal was out of GST there cannot be any tax levied on any further interest or delayed payment charge.
Observations of AAAR on Mechanism of the Securities Market
- The issues placed before the AAR was whether GST was payable on delayed payment charges collected by Appellant if a client made delay (i.e. beyond T+1 statutory time limit for payment as per SEBI Regulations) in reimbursing the expense (being purchase consideration of the securities bought for client and already collected from Appellant by Stock Exchange with T+1 time limit) to the Appellant and the Appellant charged a certain amount on delay of such reimbursement of expense, for securities purchased from the client.
- Mechanism of the Securities Market could be understood from the input provided by the National Stock Exchange (NSE) & Bombay Stock Exchange (BSE).
- In the Securities Market, clients desirous of trading with the stock Broker(s) were required to initially pay margin money either in cash or in the form of collateral security such as shares.
- On the basis of the available margin, the clients were allowed to sell and purchase securities on the Exchange through the broker.
- Payments to Stock Exchange, for such purchase of securities, where payment were not made by clients for purchase of securities of the stock exchange (within T+1 i.e., trade day plus one day) as per SEBI regulations, stock exchange debits account of the Broker against said purchases.
- Falling which the business of brokers stands shut by stock exchange under its regulations by closing trading terminal of the stock broker.
- Clients reimburse said amount to broker with charge for delayed payment. In this case, any amount which is overdue from the client towards trading or on account of any other reason to the broker will be charged from the client at the rate of 18 % P.A.
Observations of AAAR on the nature of the delayed payment charges and its taxability under the GST law
- Where the client makes delay (i.e., beyond T+1 statutory time limit for payment as per SEBI regulations) in reimbursing the expense (being purchase consideration of the securities bought for client and already collected from stock broker by stock exchange with T+ 1 time limit) to the broker and broker charges amount on delay of such reimbursement of expense, for securities purchased from the client.
- It is purely a deferment of liability only which arose since the payment was not made within the stipulated period of time by the client to the Stock Exchange for purchase of Securities.
- According to Section 2(52), `goods’ means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be served before supply or under a contract of supply;
- According to Section 2(102) ‘services’ means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged
- The expression “services” includes facilitating or arranging transactions in securities;]
- Therefore, since the service of buying and selling of securities which is exempted under GST, as per the definitions of ‘goods’ and ‘services’ under the Section 2(52) and 2(102) of CGST Act, 2017, the corresponding delayed payment charges which are also linked to the above service of trading of securities should also stand exempt under GST.
Therefore, any interest/ delayed payment charges charged for delay in payment of brokerage amount/ settlement obligations/ margin trading facility shall not be leviable to GST since settlement obligations/ margin trading facilities are transactions which are in the nature of extending loans or advances and are covered by entry No. 27 of notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017 (Underlined portion added on 27.12.2018). This amendment was brought after the Ruling in this case was given by the Authority of Advance Ruling, Uttar Pradesh, vide Order No.18 dated 14.12.2018.
Thus, in light of the above, AAAR passed the order that Applicant was not liable to pay GST on the delayed payment charges on reimbursement of amount by client to Applicant, where client failed to pay amount paid to Stock Exchange for purchase of securities with T+1 (trading day plus one day) under SEBI Regulation norms and deducted by Stock Exchange from Applicant account being purchase consideration of securities which are neither goods nor services under GST.