Stockbroking firms involved in marketing of IPOs have attracted the ire of service tax department for not paying tax on the activity.
These firms may be issued show cause notices.
After an extensive audit, the department has found most firms were not paying service tax for IPO-related marketing activities even as they received fat commissions for the same. Stockbroking is a taxable service attracting 12% tax on all related transactions. Service tax is collected from the clients of stock brokers. However, marketing of IPOs does not get covered under the stock broking service as it is essentially a business auxiliary service.
Stock broking firms charge 0.1-0.25% as commission for marketing IPOs from the registrars to any issue. The charges are higher in the high networth individual segment. Sources said most stock broking firms were not charging service tax on the service fee received from registrars. In service tax regime, the liability to collect the service tax lies with the provider, who has to collect it from the consumer and deposit it with the government.
A large number of companies tapped the capital market last year. The number of IPOs in 2007 stood at 107 against 92 in 2006. The total amount raised through the issues was Rs 45,137 crore, compared to Rs 24,679 crore in 2006.
There have also been instances of non-payment in the broking segment, especially in the futures and options segment. Brokers were found to be conducting trading in derivatives on behalf of clients in their own trading account to avoid service tax.
The service tax department has upped its ante on the stock broking service, which despite booming markets did not show very encouraging growth. In the first half of the current fiscal, the stock broking service grew just 18% to Rs 523.82 crore. Interestingly, securities transaction tax reflected the buoyancy in markets and grew by over 74% in the first nine months of the fiscal.