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Will stock transactions be subjected to additional tax under GST?
June, 21st 2016

The central GST law, the state GST law and the integrated GST law will be formulated, based on the clauses in the draft GST law

The model goods & services tax (GST) draft released by the Union government has raised questions on whether capital market transactions would be subject to an additional tax. The confusion has arisen from the definition of “goods”, which as per the draft law includes “securities”.

The model GST law released by the finance ministry on its website defines goods as “every kind of movable property other than actionable claim and money but includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract of supply”.

The draft was published for wider stakeholder consultations after it was endorsed by the empowered committee of state finance ministers. The central GST law, the state GST law and the integrated GST law will be formulated, based on the clauses in the draft GST law.

Bloomberg Quint first reported on Thursday, that securities transactions may come under the ambit of GST, with their inclusion in the definition of goods.

“At present, the definition of goods in the draft GST law includes securities. But in all likelihood, it will be exempt from GST once the exemption list comes out,” said Pratik Jain, leader-indirect tax at PwC India.

“The definition of goods under value-added tax (VAT) excludes securities. But possibly what prompted the inclusion of securities under goods in the draft GST law is the way services is defined. Services are defined as anything other than goods, which probably explains why securities have been included in the definition of goods,” Jain pointed out.

Others agree that on current interpretation, securities would come under the ambit of the GST but add that the government’s intent may not be to introduce another tax over and above the securities transaction tax (STT) of 0.1% on delivery-based trades. In case of intraday transactions in equity shares, an STT of 0.025% is levied.

As it stands now, the wording of the model law will mean that securities will end up attracting GST, said Pratik Shah, head, indirect taxes, at SKP Business Consulting LLP.

“However, it looks like the government will provide an exemption to same because globally also securities are not taxed under GST. Also, the intent of the government was never to impose to any indirect tax on securities,” added Shah.

According to Uday Pimprikar, Tax Partner at EY, securities have been included in the definition of goods under the draft GST law so that it can be exempted later. “I don’t think the intention is to levy GST on supply of securities,” said Pimprikar.

GST aims to unify the country into a common market by removing barriers across states. It will subsume all indirect taxes at the central and state level including excise duty, service tax, value added tax and octroi and simplify the taxation regime. It is expected to add to the country’s gross domestic product, improve the ease of doing business and bring down compliance costs for businesses.

The centre hopes to implement GST from 1 April 2017 but its timely roll-out hinges on the passage of the constitution amendment bill in the upcoming monsoon session of Parliament. Once the bill is passed by Rajya Sabha by a two-thirds majority, it will have to be ratified by majority of the states. Following this, Parliament has to pass the central GST law, the integrated GST law and the states have to pass the state GST law to make this a reality.

To be sure, the model GST law put up on the finance ministry’s website is only a draft and could undergo changes depending on feedback.

According to Nihal Kothari, executive director at corporate law firm Khaitan & Co. when one is selling securities, if there is value addition or profit, it will be taxable under GST.

“If GST comes in, there should be some restructuring of taxes on securities and current taxes on them may be continued or modified. But, multiple taxes are not seen being levied on securities’ transaction,” added Kothari

Currently, a share transaction attracts securities transaction tax (STT) and Krishi Kalyan cess and Swacch Bharat cess, apart from exchange transaction charges, stamp duty, clearing member charges and Sebi turnover charges.

“When you already have multiple taxes levied, I don’t think we can have GST then. My feeling is that the current system will continue, as that is generating more revenue for the government. If we move to GST for securities, then other taxes should come off,” said Hemang Jani, senior vice-president, advisory, at retail-focused brokerage Sharekhan Ltd.

“I don’t think we will have more taxes on the top of the current ones,” Jani added.

According to a Securities and Exchange Board of India study paper published in February, the retail investor interest in India’s capital market has been far short of potential. The Sebi report said that a survey of household saving and investment behaviour conducted by the National Council of Applied Economic Research (NCAER) in 2011 found that households investing in bonds, debentures, equity instruments, mutual funds and derivatives totalled 24.5 million and constituted 10.74% of all households in the country.

Higher taxes could be an added deterrent.

“This is still a model law. I don’t think they can include securities under GST at the end. I think government will come out with clarification, otherwise it will hurt our capital markets completely,” said Rakesh Rawal, chief executive of private wealth management at Anand Rathi Financial Services Ltd.

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