Mumbai: Stock brokers earning interest income by lending to clients for betting on the market will now have to pay goods and services tax, the Central Board of Indirect Taxes and Customs (CBIC) clarified earlier this week. The CBIC said brokers without non-banking financial company (NBFC) subsidiaries will have to pay 18 per cent GST on interest earned from margin funding and delayed settlement payments.
The move will add to the cost of transaction for clients and squeeze smaller broking firms that do not own NBFCs. Till now, these firms did not pay GST on such interest income.
The apex authority on indirect taxes introduced this in its new circular on frequently asked questions (FAQs). “Any interest, delayed payment charges charged for delay in payment of brokerage amount, settlement obligations, margin trading facility shall be leviable to GST,” the document said. Earlier, interest on belated payments alone was subject to GST and not the interest earned through margin funding.
The new FAQ says GST will be levied on interest earned on margin funding as well.
Stock brokers usually lend to clients either through their NBFC arms or from their own books. Most of the larger established brokers fund clients through their NBFCs. But the client must bring in an upfront margin in that case. Also, there are restrictions on the stocks a client can invest in through the funded money. There is a different set of rules for margin funding which is directly from a broker’s books.
Nearly 60 per cent of registered stock brokers do not have NBFCs and offer funding to clients from their own balance sheets. They usually earn 14-21 per cent on the money lent, according to market participants. There were 7,844 stock brokers registered in the country as on May 31, 2018, according to the Sebi website.
Brokers said the new tax rules will hurt. “This stand taken by the revenue department will lead to migration of funding business, including margin trading, from books of brokers to books of NBFCs,” said Uttam Bagri, chairman, BSE Brokers Forum. “There would be no revenue gain for the government, but operational pain for stock brokers without NBFCs.”
Margin funding has been the fastestgrowing business for retail brokerages. Many earn more than 70 per cent of their net income through such loans.
“When NBFCs are exempt from GST on interest income earned on advances, why can’t the same treatment be given to brokers?” said K Suresh, board member and former president of Association of National Exchanges Members of India (ANMI). “GST on such margin funding will add to the cost of transaction for clients, which in turn will affect this channel of business.”
The industry bodies for stock brokers plan to approach the finance ministry seeking a relaxation in the rule.
Indirect tax experts too said that margin funding, which is like the lending business, should be kept out of GST.
“There seems to be some misunderstanding regarding margin funding,” said Sachin Menon, head-indirect tax, KPMG. “Interest earned on margin funding or advances for delayed settlement payments should have been outside the purview of GST as services by way of extending loans and advances is exempted by the GST Council.” “Margin funding and delayed settlement funding is nothing but loans extended to customers,” he added.