'Taxing securities transactions based on value under GST would impact trading'

The financial services industry must be spared a compliance nightmare when the goods and services tax (GST) is rolled out. The industry is happy to pay whatever tax is due but would like the Centre and the states to sort out how to share the proceeds amongst themselves without making service providers jump through hoops to facilitate that division. Most financial services span multiple states and extensively use computer networks and servers, whose location at a particular site has no real bearing on where, and from where, a service using those networks is rendered. The sensible thing to do would be to treat all financial services as inter-state transactions to be taxed under Integrated GST, with all vendors to financial services also being taxed under IGST, so as to avoid accumulation of input tax credits that cannot be availed of.

Absurdly, the model law treats securities as goods. Taxing securities transactions on the value of securities would kill trading in securities and cripple the role of the capital markets in allocating capital to different alternative uses and hedging risk. A bond or a share is a unit of capital with particular characteristics including risk and return associated with it. It is an input to value addition, not value addition in itself. No value-added tax should apply to capital, per se. The process of matching suppliers of capital with those looking for it is indeed a service that should be and is taxed. The government must amend the model law to remove the anomaly of treating financial services as goods.

The GST Council must see reason on the matter. The model law also proposes to tax intra-firm supplies of services without any payment attached to the service. The tax on intra-firm cross-border supply of services will lead to complex valuation challenges and possible transfer pricing disputes, and prove a compliance nightmare that yields little tax. It should be scrapped. The limited time available to configure complex IT systems to comply with the tax is the other challenge. Australia gave companies a clear 12 months to comply with the tax after the rules were finalised and made public.