With ‘securities’ being included in the definition of ‘goods’ under section 2(48) of the draft model Goods and Services Tax Act, 2016 (GST), industry circles, especially stock markets, brokers, banks and mutual funds, are confused about whether GST would be levied on securities transactions.
If one looks at the history of indirect tax legislation in India, securities being essentially investments, activity of sale and purchase therein has never been subjected to any service tax and value added tax (VAT). Even the definition of ‘goods’ currently under various state VAT legislations excludes securities and is accordingly not subjected to any sales tax. Further, even the current service tax law includes securities in the definition of ‘goods’ but the same is with the intention of excluding it from service tax, as trading in goods is outside the ambit of service tax. So does it mean that the intention of the Government has suddenly changed and it has decided to levy GST on transaction in securities?
Firstly, GST is fundamentally a destination based ‘consumption’ tax whereas securities are ‘investments’. Imposing a value added tax on something which merely represents investments would go against the principle of GST. What can be subjected to GST, in our view, are services such as brokerage, commissions, bank charges, etc which inevitably accompany transactions in securities and not the securities themselves. Such services are in the service tax net already and the industry should definitely not mind if the same continues in the GST regime with the added advantage of a liberal credit scenario.
Further, on the one hand the definition of goods includes ‘securities’ and on the other, it excludes money and actionable claims. It is not incorrect to say that many forms of ‘securities’ can also partake the character of actionable claims and transaction in money such as instruments representing beneficial interest in movable property, unsecured debts, promissory notes, etc. Hence, it can be argued that there is a conflict in the understanding and thought that has gone into drafting the definition of goods. This is also evidenced by the fact that the definition of goods in the current Service tax law and the draft GST Act are almost identical in nature.
Subjecting securities to GST would also lead to various absurd scenarios where in sale of securities to Foreign Institutional Investors (FIIs) based out of India would most likely qualify as export (subject to receipt in convertible foreign exchange) and be zero rated, where as domestic sale of the same securities could be subject to GST. Surely, the government does not desire a scenario which incentivises all investments in India to be routed through foreign shores, sounding a death knell for domestic investments.
From the above, what best can explain the inclusion of securities in the definition of goods is that under the draft GST law, certain activities are specifically declared as ‘services’ which possess the attributes of both goods and services to remove ambiguity and including securities within the definition of ‘goods’ is probably a mechanism through which the government would either exempt or exclude the same from the ambit GST either through rules or notifications to be framed in the future or through the final Act itself. In any case, it would be too much to read into the mere definition of goods and draw far fetched conclusions at this stage.
Another important aspect to be noted is the treatment of reversal of Cenvat credits pertaining to trading of goods in the current credit regime. Under Rule 6 of Cenvat Credit Rules, 2004 which provides for reversal of credits, ‘securities’ and goods other than securities have been accorded separate treatment. It should be noted that the ‘value’ of trading for goods other than securities has been defined as difference between the sale price and the cost of goods sold or ten percent of the cost of goods sold, whichever is more. Whereas, the ‘value’ for trading of securities has been defined as difference between the sale price and the purchase price of the securities traded or one percent of the purchase price of the securities traded, whichever is more. This shows that even the current service tax law recognises the difference in the nature of securities, and goods other than securities. Both have been accorded significantly different treatment as far as reversal of credits are concerned.
Last but not the least, under most international GST laws whether it be in Australia, Cananda or Singapore, sale and purchase of securities such as shares and bonds have been exempted from the levy of GST. Though, GST in India is expected to deviate somewhat from the GST laws currently in force internationally, the broad principles including the taxability of transaction in securities would most likely be in line with practices in other GST jurisdictions.
In a nutshell, while the said topic is the talk of the town, we do not expect any nasty surprises from the Government in an area such as securities which has long experienced a settled and stable indirect tax regime. Representation to resolve this issue / get clarification can surely be done with the Ministry of Finance by the concerned associations. It would be interesting to watch the developments in this space.
The article is authored by Pratik Shah and Jigar Doshi from SKP. SKP is a tax consulting firm. The views above are personal.