INDIA BUSINESS WORLD - JUNE 2006
THE MONTH THAT WAS...

VEX POPULI: SERVICE TAX ON BROKERS SET TO GO UP

  A NEW irritant awaits the market. Stock brokers may have to fork out more service tax. The new service tax valuation rules which came into effect recently will change the base on which the tax is calculated. Service tax is paid on the 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 which is 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 has paid. Thus, the service tax was calculated on an amount which was lower than the commission earned by the broker.

They did this since the rules were silent on the matter, and tax authorities never bothered. But chances are that now they will, thanks to the new rules.

The new rules say that service tax is on the gross consideration, which means the entire commission and not the amount arrived at after deducting the stamp duty. Though the rules allow for a few deductions, stamp duty is not one of these.

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 of aware of the issue.

“It's like a sleeping dog...no one wants to rake it up. However, brokers are aware of the possibility that they may have to face a higher service tax outgo. It is being discussed informally among them,” said a source.