No break for brokers

MUMBAI: The new service tax valuation rules, which came into effect recently, will change the base on which tax is calculated. Service tax is to be paid on brokerage income, which, on an average, works out to 0.5% of the transaction value. The broker is also required to pay a stamp duty of 0.01%.

Till now, broking houses were deducting the stamp duty outgo from the brokerage commission to arrive at the net income on which the service tax was paid. Thus, the service tax was calculated on an amount which was lower than the commission earned by the broker.

They did this as the rules were silent on the matter and tax authorities never bothered.
The new rules mandate service tax on the ‘gross’ consideration, which means the calculation will factor in the entire commission and not the amount arrived at after deducting stamp duty. Though the rules allow for a few deductions, stamp duty is not one of them.

For retail transactions, the amount may be small enough to be ignored. But the absolute brokerage earned on bulk trades placed by FIIs is high and a change in the service tax calculation could make a difference. On a monthly basis, this may not be an insignificant sum.

The new service tax rules came into effect on April 19. Market intermediaries are aware of the issue. “It’s like a sleeping dog. No one wants to wake it up.

However, brokers are aware of the possibility that they may have to face a higher service tax outgo. The issue is being discussed informally among them,” said a source.

It’s a matter of interpretation and one is unclear which way the excise department would go. While it’s perceived that even if the department does not insist on the amended calculation immediately, given a choppy market and recent losses suffered by investors as well as brokers, the matter might be pursued at a later point.

A pointer to this is the department’s intention to levy service tax on entry and exit loads of mutual funds. These are charges that investors have to bear while buying or selling mutual fund units.

Even though fund houses along with the industry-level organisation, Amfi, think that this would amount to double taxation, the excise department has spelt out that there should be a service tax on the loads.