No service tax on late payment by stock investors

Stock market investors would not have to pay service tax on any late payment charges paid by them to their brokers, provided such fines are shown separately in the account statement. The finance ministry has clarified the matter with the Securities and Exchange Board of India (Sebi), which, in turn, has informed the stock exchanges about the same.

The stock exchanges have issued a circular to their member brokers, saying that no service charge be deducted on late-payment charges collected by them from their clients. Brokers typically levy a penalty or late-payment charge on customers, if they do not make the required payment for their share purchases or various other fee. However, there has been an ambiguity regarding the leviability of any service tax on such payments. As a result, while some brokers deduct service tax, others do not.

In a communication to various concerned authorities on this matter, the finance ministry’s Central Board of Excise and Customs said it had received representations “seeking clarification regarding leviability of service tax on the additional amount collected towards the delay in making payment to the stock brokers by their customers (as delayed payment charges) in respect of stock brokers’ services.”

CBEC said it examined the practice in other similar segments and found that an amount collected for delayed payment of a telephone bill did not form a part of the value of taxable service. It also found that no service tax was being levied in some other similar segments.

“In a similar manner, delayed payment charges received by the stock brokers are not includible in taxable value, as the same are not the charges for providing taxable service and were more in the nature of a penal charge,” CBEC noted.

However, it said that the Finance Act provided for a service tax being chargeable on taxable value, which shall be the gross amount charged by the service provider. Therefore, a service tax would be chargeable on the entire amount, if the account statement, invoice or bill showed only the gross amount, without indicating the delayed payment charges separately. “Delayed payment charges would not be includible in ‘gross value charged’ only if these charges are shown separately in the account statement/invoice/bill, etc,” the CBEC memorandum clarified.