No service tax for sub-brokers

The Budget proposal to reduce paperwork for sub-brokers by excluding them from the purview of service tax has cleared the confusion caused by a recent observation made by the Comptroller and Auditor General of India (CAG).

In a recent remark against sub-brokers of Kerala-based Geojith BNP Paribas Financial services, CAG had noted that sub-brokers were not paying service tax even while they were taxable under “Business Auxiliary Services” (Section 65-19 of the Service Tax Rules). Based on this observation, tax authorities had issued orders to several south India-based sub-brokers to pay service tax.

CAG was of the view that sub-brokers were providing services to clients of Geojit and hence, they came under ‘Business Auxiliary Services’ and were liable to pay service tax.

Sub-brokers, however, said this was unfair as contract notes to clients were issued by member-brokers and payments too were received and made by them. In this process, the main broker deducted service tax and paid commission to sub-brokers. So, sub-brokers should not be asked to pay service tax, they argued.

However, just to avoid harassment by tax authorities, sub-brokers in Mumbai paid service tax directly and claimed it later from member-brokers.

This not only increased paperwork but also the administrative cost for tax authorities as there are 40,000 sub-brokers registered with the Securities and Exchange Board of India (Sebi).

“While there would be no revenue implications for brokers on account of this proposal, it would certainly make life more hassle-free for both brokers and tax authorities, and bring down unnecessary cost incurred due to increased paperwork,” said Manoj Desai, a Mumbai-based sub-broker.