Taxability on Supply of Securities under Securities Lending Scheme, 1997 under RCM as IGST w.e.f. Oct 01, 2019

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Background:

  • The Securities and Exchange Board of India (SEBI) has prescribed the Securities Lending Scheme, 1997, for the purpose of facilitating lending and borrowing of securities. Under the Scheme, the lender of securities lends to a borrower through an approved intermediary to a borrower under an agreement for a specified period with the condition that the borrower will return equivalent securities of the same type or class at the end of the specified period along with the corporate benefits accruing on the securities borrowed. The transaction takes place through an electronic screen-based order matching mechanism provided by the recognised stock exchange in India. There is anonymity between the lender and borrower since there is no direct agreement between them.
  • For the purpose of GST Act, the “securities” shall have the same meaning as assigned to it as per section 2 (c)(h) of the Securities Contracts (Regulation) Act, 1956 [i.e. Section 2(101) of the CGST Act].

The definition of services as per Section 2(102) of the CGST Act, is extracted as below: – “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;

Explanation: For the removal of doubts, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities;

  • Securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 are not covered in the definition of goods under section 2(52) and services under section 2(102) of the CGST Act. Therefore, a transaction in securities which involves disposal of securities is not a supply in GST and hence not taxable.
  • The explanation added to the definition of services w.e.f. February 01, 2019 i.e.” includes facilitating or arranging transactions in securities” is only clarificatory in nature and does not have any bearing on the taxability of the services under discussion (lending of securities) in past since 01.07.2017 but relates to facilitating or arranging transactions in securities.

Clarification:

The CBIC vide Circular No. 119/38/2019- GST dated October 11, 2019, has clarified as under:

  • The supply of lending of securities under the scheme is classifiable under heading 997119 and is leviable to GST@18% under Sl. No. 15(vii) of Notification No. 11/2017- Central Tax (Rate) dated June 28, 2017.
  • For the period July 01, 2017 to September 30, 2019, GST is payable under forward charge by the lender and request may be made by the lender (supplier) to SEBI to disclose the information about borrower for discharging GST under forward charge. The nature of tax payable shall be IGST. However, if the service provider has already paid CGST / SGST / UTGST treating the supply as an intra-state supply, such lenders shall not be required to pay IGST again in lieu of such GST payments already made.
  • Therefore, with effect from October 01, 2019, the borrower of securities shall be liable to discharge GST as per Sl. No 16 of Notification No. 22/2019-Central Tax (Rate) dated September 30, 2019 under reverse charge mechanism (RCM). The nature of GST to be paid shall be IGST under RCM.