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No service tax on late payment charges by stock investors
December, 12th 2011

Stock market investors would not have to pay any service tax on any late payment charges paid by them to their brokers, provided such fines are shown separately in the account statement.

The Ministry of Finance has clarified the matter to the capital market regulator Sebi (Securities and Exchange Board of India), which in turn has informed the stock exchanges about the same.

On their part, the stock exchanges have issued a circular to their member brokers that no service charge should be deducted on late-payment charges collected by them from their clients.

The stock brokers typically levy a penalty or late- payment charges on their customers, if they do not make the required payments for their share purchases or to meet other obligations like payment of various fees.

However, there has been an ambiguity regarding the leviability of any service tax on such payments, as a result of which some brokers have been deducting service tax and some others have been not.


In a communication to various concerned authorities on this matter, the Central Board of Excise and Customs of the Ministry of Finance said that representations had been received by it "seeking clarification regarding leviability of service tax on the additional amount that is collected towards the delay in making payment to the stock brokers by their customers (as delayed payment charges) in respect of stock brokers' services."

The board (CBEC) said that it examined the practice in other similar segments and found that an amount collected for delayed payment of a telephone bill did not form a part of the value of taxable service. It also found that no service tax was being levied in some other similar segments.

"In a similar manner, delayed payment charges received by the stock brokers are not includible in taxable value as the same are not the charges for providing taxable service" and such charges were more in the nature of a penal charge, CBEC noted.

However, it said that the Finance Act provided for a service tax being chargeable on taxable value, which shall be the 'gross amount charged' by the service provider.

Therefore, a service tax would be chargeable on the entire amount, if the account statement, invoice or bill showed only the gross amount, without indicating the delayed payment charges separately.

"Delayed payment charges would not be includible in 'gross value charged' only if these charges are shown separately in the account statement/invoice/bill etc," the CBEC memorandum clarified.

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