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Confusion over service tax on stock transaction fees
July, 28th 2006

Would brokers of the National and Bombay stock exchanges have to pay service tax on the transaction charges levied by the exchanges? The question is bothering many a member of these exchanges.

The issue came to light after some of the members of NSE, were issued show cause notices recently by service tax authorities.

Since the budget provisions this year had not clarified the picture, the Central Board of Excise and Customs may have to come out with a clarification on the subject soon.

Exchanges charge fees on brokers on the basis of the monthly business turnover. These fees are in addition to the system usage charge, deposits and margins that they collect from their members.

The problem on the service tax front has arisen because it is difficult for the brokers to pass the incidence on to their clients on a one-to-one basis, unlike the securities transaction tax, which is passed on.

The new levy would be in addition to the service tax, brokers charge clients as brokerage fees. The Association of Members of NSE of India (AMNI) has therefore given a representation to the indirect tax department on the issue, seeking a clarification.

Among the other levies brokers pay, is a fees imposed by Sebi, on a graded reducing scale for the first five years of their business.

According to service tax expert JK Mittal, while as per the trade practice, service tax is being paid on the brokerage charge from client, other charges recovered from the client may also be the part of value on which service tax is payable.

He said this is because of specific provisions (determination of value- rules 06). Therefore, there is a need to clarify the issue to avoid unnecessary litigation.

Brokers say that their clients usually pay up in a lump sum, for the trades conducted depending upon the methodology agreed between them.

The two usual methodologies followed are to either charge separately in each contract note over-and-above the brokerage, or on a combined basis.

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