Clarification regarding taxability of supply of securities under Securities Lending Scheme, 1997.

Circular No.: 119/38/2019-GST
Date of Circular: 11th October 2019
Relevant Sections and Rules:

• CGST Act, 2017:
  • Section 2(102): Definition of services
  • Section 2(101): Meaning of “securities” (adopts definition from Securities Contracts (Regulation) Act, 1956)
  • Section 168(1): Power to issue instructions
• Securities Contracts (Regulation) Act, 1956: Section 2(h)
• Notification No. 11/2017-CT(R): Sr. No. 15(vii), heading 997119
• Notification No. 22/2019-CT(R) dated 30.09.2019: Reverse charge provisions

Summary of Circular:

This circular provides clarification on the taxability of securities lending transactions under the Securities Lending Scheme, 1997 (SEBI), especially regarding the applicability of GST on such transactions, the relevant tax rate, and the change from forward charge to reverse charge mechanism (RCM).

1. Structure of Securities Lending Scheme:

• Lenders lend securities to borrowers via SEBI-approved intermediaries.
• The lender receives a lending fee while the borrower returns equivalent securities later.
• This transaction is executed through anonymous order matching on stock exchanges.

2. Taxability of Lending of Securities:

• Though securities are excluded from the definition of goods or services, lending of securities is not a transaction in securities since it doesn’t involve disposal or sale.
• Lending of securities is treated as a service under Section 2(102) of the CGST Act.
• Therefore, lending fee is consideration for a taxable service, and GST applies since 01.07.2017.

3. Classification and Rate:

• The activity is classifiable under Service Code 997119.
• GST Rate: 18%, as per Sr. No. 15(vii) of Notification No. 11/2017-CT(R), as amended.

4. Tax Liability Timeline:
5. a) From 01.07.2017 to 30.09.2019 – Forward Charge:

• Lender is liable to pay GST.
• Lenders may request SEBI to provide borrower details for tax compliance.
• Nature of tax: IGST (for inter-state supplies).
• If CGST/SGST already paid treating it as intra-state supply, no additional IGST is required.

1. b) From 01.10.2019 onwards – Reverse Charge:

• Borrower is liable to pay GST under Reverse Charge Mechanism (RCM).
• Nature of tax payable: IGST under RCM.

5. Intermediary Services:

• Services provided by SEBI-registered intermediaries (e.g., clearing corporations) for facilitating securities lending are separately taxable under GST.

Source: Circular No.: 119/38/2019-GST