Stock brokers not to pay GST on delayed payment charges from clients

The Appellate Authority for Advance Ruling (AAAR), Uttar Pradesh, has modified an earlier order by the Authority for Advance Ruling (AAR), exempting tax on delayed payment interest or penalty charged by a broker from clients for undertaking share sale and purchase activity.

The AAAR order came in the matter of SPFL Securities Ltd that had challenged a 2018 AAR order that made such charges received by the stock broker taxable.

"The clarification would go a long way in helping stock brokers who often facilitate payment from their accounts on behalf of their clients for buying and selling shares on bourses. Taxes on delayed charges received by them from their clients would have prevented brokers to offer such facility to clients and hampered the overall share trading activity," said a sector expert from a leading accountancy firm not willing to be named.

In its order allowing GST exemption on delayed charges, the AAAR said that since a broker charges amount on delayed payment made by a client, such transaction is purely a deferment of liability. Therefore, since the service of buying and selling securities is exempted under GST, the corresponding delayed payment charges, which are also linked to the above service of trading of securities, should also stand exempt under GST, it said.

The appellate authority also cited a FAQ issued by the Central Board of Indirect Taxes and Customs earlier that clearly mentions that any interest, delayed payment charges charged for delay in payment of brokerages amount/settlement obligations/margin trading facility shall not be leviable for GST.

In the matter of SPFL Securities Ltd, the AAR in 2018 had ruled that the applicant-stock broker shall be liable to pay GST on delayed payment of charges as the applicant provides services of trading of securities on behalf of the customers which is a 'supply of service' on which the applicant pays GST and delayed payment charges squarely are covered under GST.

The CBIC FAQ was issued post this order of AAR but in the absence clarity due to an earlier conflicting order, the current of the appellate authority has cleared the cloud on the matter.