Gst On Supply Of Securities Under Securities Lending Scheme

Due to the following two recent amendment, the GST taxability of supply of securities under

Securities Lending Scheme has undergone a considerable change:

Insertion of explanation to the definition of ‘Services’; and
Adding the service to the list of reverse charge mechanism, henceforth, making the borrower liable to pay GST on the transaction.

The present article thoroughly explains the position of GST taxability of supply of securities under the Securities Lending Scheme covering recent clarification issued by the Board, which can be accessed below.

Understanding the Securities Lending Scheme

Before understanding the

GST implication and amendments thereon, it is firstly important to under the Securities Lending Scheme, which is explained hereunder: The Securities and Exchange Board of India (SEBI) introduced a scheme called ‘Securities Lending Scheme, 1997', which was effective from 6th February 1997. The scheme works as under:

Based on an agreement, the ‘Lender’ deposits the securities with an approved intermediary. The lender deposits the securities with the purpose of lending; however, the beneficial interest and all the corporate benefits will accrue to the lender.
‘Borrower’ is a person who borrows the securities from the approved intermediary with the condition that he will return equivalent securities of the same type/class at the end of the specific period.
It is important to note here that the agreement is entered between the Lender and an approved intermediary, and the borrower and an approved intermediary. There is no direct agreement between the lender and the borrower.
The scheme clearly states that the lending of the securities and subsequent return of the equivalent securities of the same type and class by the borrower shall not be treated as ‘disposal of the securities’.

It should be noted here that the lender, lending the securities, would be charging the lending fees. Such lending fees are payable by the borrower of the securities.

Understanding the GST taxability, along with amendments, of supply of securities under the Securities Lending Scheme

The term ‘Services’ is defined under section 2(102) of the CGST Act. As per the definition, Services means anything other than goods, money and securities. Further, the term ‘Goods’ is defined under section 2(52) of the CGST Act. As per the definition, Goods means every kind of moveable property other than money and securities. Thus ‘Securities’ is outside the purview of both the definition of ‘Services’ and the definition of ‘Goods’. Concluding thereby that any transaction in securities, which involves disposal of securities, is not a supply under GST and hence not taxable. With effect from 1st February 2019, an explanation has been inserted to the definition of ‘Services’ which states as under: ‘For the removal of doubts, it is hereby clarified that the expression ‘Services’ includes facilitating or arranging transactions in securities.’ Effect of insertion of the above explanation is summarised hereunder:

Firstly, the explanation is clarificatory in nature, and hence the same would be applied retrospectively.
Secondly, the activity of lending of securities is not a transaction of securities since it does not involve the disposal of securities, and hence the same would be taxable under GST.

Highlighting the recent clarification by the Board

Recently on 11th October 2019, the Central Board of Indirect Taxes and Customs came up with circular no.119/38/2019-GST clarifying various points in the matter. The clarification is summarised as under:

Classification

- The supply of lending of securities under Securities Lending Scheme is classifiable under heading 997119.

Rate of GST

- GST is payable @ 18% as per sr. no.15(vii) of notification no.11/2017-Central Tax (Rate) dated 28.06.2017 as amended.

Taxability during the period 1st July 2017 to 30th September 2019–

- During the period 1st July 2017 till 30th September 2019, GST is payable under forward charge, i.e. GST is payable by the lender (supplier).
- The ledger is liable to pay IGST. However, in case the ledger has already discharged the tax liability under CGST/SGST/UTGST (treating the transaction as intra-state supply), then, the lender is not required to pay IGST.
- In order to calculate the IGST liability payable by the lender, the ledger can request the SEBI to disclose information about the borrower.

Taxability from the period 1st October 2019–

- From 1st October 2019, GST is payable under reverse charge mechanism, i.e. GST is payable by the borrower (receiver).
- Vide notification 22/2019 – Central Tax (Rate) dated 30th September 2019, new sl. no.16 has been inserted, which makes reverse charge mechanism applicable to services of lending of securities under Securities Lending Scheme, 1997.
- The borrower is required to pay IGST under reverse charge mechanism.

The gist of the entire discussion

GST is not payable in case of transaction of securities which involve disposal of securities.
Supply of securities under the Securities Lending Scheme doesn’t involve disposal of securities, and hence GST is payable on the same.
From 1st July 2017 to 30th September 2019, GST is payable under forward charge by the lender and from 1st October 2019, GST is payable under reverse charge mechanism by the borrower.

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Frequently Asked Questions

Common questions about GST on Securities Lending: Tax Implications & Amendments.

The Securities Lending Scheme, 1997 is a scheme introduced by the Securities and Exchange Board of India (SEBI) that allows lenders to deposit securities with an approved intermediary for the purpose of lending. The borrower borrows these securities from the intermediary with the condition of returning equivalent securities of the same type/class at the end of the specified period.

Yes, the lending of securities under the Securities Lending Scheme, 1997 is considered a supply under GST. Earlier, it was not considered a supply as securities were outside the purview of the definitions of 'Services' and 'Goods' under the CGST Act. However, with the insertion of an explanation to the definition of 'Services' from 1st February 2019, the activity of lending securities is now considered a supply under GST.

The supply of lending securities under the Securities Lending Scheme, 1997 is classifiable under heading 997119 and attracts GST at the rate of 18% as per notification no.11/2017-Central Tax (Rate) dated 28.06.2017, as amended.

Before 1st October 2019, the lender (supplier) of securities under the Securities Lending Scheme, 1997 was liable to pay GST on the supply. The lender was required to pay IGST on the supply, or if they had already paid CGST/SGST/UTGST, they were not required to pay IGST.

From 1st October 2019 onwards, the borrower (receiver) of securities under the Securities Lending Scheme, 1997 is liable to pay GST on the supply under the reverse charge mechanism. The borrower is required to pay IGST under the reverse charge mechanism.

To calculate the IGST liability payable before 1st October 2019, the lender can request SEBI to disclose information about the borrower. With this information, the lender can determine the IGST liability payable on the supply.

No, any transaction of securities that involves the disposal of securities is not considered a supply under GST and hence not taxable. The GST is applicable only on the supply of securities under the Securities Lending Scheme, 1997, which does not involve the disposal of securities.

The clarification issued by the CBIC on 11th October 2019 aimed to clarify various points related to the GST taxability of the supply of securities under the Securities Lending Scheme, 1997. It provided clarity on the classification, rate of GST, taxability before and after 1st October 2019, and the liability to pay GST under the reverse charge mechanism.

The insertion of the explanation to the definition of 'Services' under the CGST Act from 1st February 2019 clarified that the expression 'Services' includes facilitating or arranging transactions in securities. This explanation brought the activity of lending securities under the Securities Lending Scheme, 1997 within the purview of GST.

The amendment making the supply of securities under the Securities Lending Scheme, 1997 subject to reverse charge mechanism from 1st October 2019 shifts the liability to pay GST from the lender (supplier) to the borrower (receiver). This amendment aims to address the practical difficulties faced by the lenders in determining the IGST liability payable on the supply.