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GST on Supply of Securities

GST on Supply of Securities under Securities Lending Scheme

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.

Taxability of supply of securities under Securities Lending Scheme, 1997

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:

  1. Classification
    • The supply of lending of securities under Securities Lending Scheme is classifiable under heading 997119.
  1. 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.
  1. 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.
  1. 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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