Understanding GST Exemptions for Securities Transactions
This article clarifies the application of Goods and Services Tax (GST) to securities transactions in India. It explains why securities, as financial assets, are exempt from GST, distinguishing them from goods and services. While the direct buying and selling of securities are not subject to GST, the article highlights that related services, such as brokerage fees, do incur GST. It also discusses the Securities Transaction Tax (STT) as the primary tax levied on these transactions.
Engaging in securities trading involves various tax considerations. Businesses dealing with buying and selling securities must ensure adherence to relevant tax regulations. This guide explores the applicability and exemptions of Goods and Services Tax (GST) concerning securities transactions.
Do Securities Transactions Incur GST?
Securities are financial tools used for trading, signifying either equity or debt ownership. Both private entities and governments issue these instruments to acquire capital. Initial issuances occur in primary markets, while existing security holders can trade them in secondary markets. GST operates as an indirect tax levied on the supply of goods and services. However, securities are classified as financial assets, distinct from both goods and services. Consequently, the Goods and Services Tax Act of 2017 does not apply to the buying and selling of securities.
Rationale Behind GST Exclusion for Securities
The primary reason for excluding securities from GST stems from the definitions of 'goods' and 'services' outlined in the Central Goods and Services Tax (CGST) Act, 2017.
The definition of 'goods' encompasses movable property and physical items with an actionable claim, specifically excluding money and financial assets.
Similarly, 'services' are defined as anything not falling under goods, money, or financial assets.
Furthermore, 'supply' involves the sale, exchange, transfer, or lease of goods or services for consideration.
Since securities are categorized as financial assets, they do not qualify as either goods or services, meaning their sale and purchase do not constitute a 'supply' under GST. Nevertheless, services provided to facilitate these financial transactions, such as brokerage activities, are subject to GST. For instance, a broker arranging the sale or purchase of securities is required to charge GST on their brokerage fees. Currently, GST on brokerage services for securities is 18%.
Consider a scenario where XYZ Associates, a stock brokerage firm, facilitated the sale of equity shares valued at Rs 10,00,000 with a brokerage fee of 0.1%.
- The total brokerage fee would be Rs 1,000 (0.1% of Rs 10,00,000).
- At an 18% GST rate, the GST on this brokerage would be Rs 180.
- Therefore, the total cost for the seller, including brokerage and GST, would amount to Rs 1,180 (Rs 1,000 + Rs 180).
Taxation on Securities Transactions
Securities Transaction Tax (STT) is levied on the buying and selling of securities. This direct tax is collected at the source for transactions executed on stock exchanges recognized by SEBI. STT is calculated as a percentage of the total transaction value.
Securities subject to STT include:
- Equity shares
- Derivatives (such as Futures and Options)
- Equity-focused mutual funds
- Exchange Traded Funds (ETFs)
- Government securities with an equity characteristic
- Securitized debt instruments.
It is important to note that STT is not applied to commodity derivatives or foreign exchange derivatives.
Conclusion
The GST exemption for buying and selling securities does not extend to the charges for facilitating these transactions, such as brokerage fees. When engaging in securities transactions, it is essential to consider GST costs as part of the overall expenses.