Hundreds of sub-brokers are in a quandary. Tax authorities have served notices on them asking for payment of service tax for the last four years.

The arrears and penalty together run into crores of rupees and in the current market conditions, this could drive many of them out of business, said a stockbroker.

The tax authorities, it is learnt, have acted on the basis of an observation made by the Comptroller and Auditor-General (CAG) that services rendered by a sub-broker to the main broker are taxable under Business Auxiliary Services (under Section 65(19) of the Service Tax Rules).

However, brokers say, since sub-brokers do not directly issue bills and collect payments from clients, they are not registered with the Service Tax Department. They are registered with the main broker and the service taxes on brokerages are collected and paid by the main broker.

It is learnt that over 200 sub-brokers of Geojit Financial Service Ltd, a Kerala-based broking firm, received notices asking them to pay service tax from October 2004. Some sub-brokers based in Karnataka also are understood to have received similar notices.

Compliance verification

In the case of Geojits sub-brokers, it is learnt that the notices were issued after an audit by the CAG to verify service tax compliance by the broking firm in which KSIDC (a Kerala Government undertaking) has an equity stake.

The CAG is said to be of the view that the sub-brokers are providing services to the clients of Geojit on behalf of the broking firm and hence, come under the Business Auxiliary Services and liableto pay the service tax.

When contacted, Mr C.J. George, Managing Director, Geojit, said the tax department was aware that it is not a justifiable case, but was helpless in view of the CAGs observations.

No revenue loss

The CAG had claimed huge revenue loss on account of sub-brokers. However, the claim on Geojits sub-brokers, even if it is legally settled, will not have revenue implications as taxes paid can be set off under Cenvat credit rules. Therefore, the CAGs claim of huge revenue loss from sub-brokers is not correct, Mr George said.

If the department goes ahead with its claim and forces sub-brokers to pay, most of them will have to shut shop, rendering around 2 lakh people jobless, Mr George said.

A sub-broker said the contract notes to his clients are issued by the member-broker; Payments are made and received by him. He deducts applicable taxes from brokerage and pays directly. We do not receive any money directly from the client, so there is no question of us having to pay service tax, he said.

Asking sub-brokers to pay service taxes directly can only increase the tax departments administrative costs, said a Mumbai-based broker. There are around 40,000 sub-brokers registered with the Securities and Exchange Board of India. They are attached to around 200 brokers. Instead of collecting the tax through the 200 brokers, the department will have to claim it from 40,000 sub-brokers, he said.

There was a time when sub-brokers were directly raising bills and making payments to their clients. As sub-brokers are notified with the Service Tax Department for centralised billing, there is no tax evasion, he said.