Does amount collected as prepaid brokerage attracts service tax?
ONE of our Netizens forwarded us the following news item published in the Economic Times and wanted to know the implication of service tax on such prepaid brokerage collected by the stock brokers.
News Item published in 19th January, ECONOMIC TIMES
MUMBAI: Prepaid brokerage schemes have made a spectacular comeback as big stock broking firms look to hook as many clients as possible while the upbeat market sentiment lasts and customers flock to a trading system that is up to 40% cheaper.
Market watchers see the system of collecting commissions before trades - similar to a prepaid mobile card — intensifying, with the stock market expected to continue its heady run this year. Advance credit/deposit, or prepaid brokerage in popular parlance, is typically in vogue during a market rally when bullish investors expect plenty of trading opportunities.
“Of the 15,000 new accounts we add every month, about 30% customers opt for these schemes,” says R Kalyanaraman, senior vice-president, client acquisition, Sharekhan.
Sharekhan and other brokerage majors such as Motilal Oswal, Angel Broking, Reliance Money, Anand Rathi and Kotak Securities are all seeing an uptick in prepaid schemes. Large brokerage houses are keen on such schemes as their infrastructure keeps a check on costs while margins improve with a surge in the number of clients.
“There has been an average monthly growth of 25% in the number of new clients opting for this (prepaid) system,” says Vinay Agrawal, equities broking executive director, Angel Broking.
The upsurge in prepaid brokerage schemes, according to analysts, is a reflection of the buoyant outlook for the stock market as the facility works on the principle of a validity period, just like cellphone cards. The trader/investor has to make use of the available credit before the end of the validity period, failing which it is forfeited.
For instance, if the standard brokerage rate is 10 paise per Rs 100 trade in the futures and option segment, a client using the prepaid facility will be charged only 6 paise per Rs 100, provided Rs 2,000 is paid upfront. Each time a client trades with the brokerage house, the commission would be deducted from this amount. In the conventional trading system, charges are on a per trade basis.
So, if investors are lapping up this scheme, they are surely upbeat about the prospects of the stock market, at least in the next one year.
Indeed, most experts presage the staggering returns of last year to continue in 2010, underpinned by an economy largely unshaken by the global downturn.
We made a curious search in our archives to find if any clarification was issued by the CBEC on the issue and to our surprise, we find CBEC did give a clarification on the issue in response to a similar news item carried by the same news paper some time back during 2008. The Board vide letter F.No. 341/93/2008-TRU dt. 13th October, 2008 has clarified that such amounts collected does attract service tax.
The Board had clarified, “the amount charged explicitly as commission or brokerage being conditional, cannot be treated as total consideration. The money value of the conditions stipulated should also be added with the commission or brokerage to determine the taxable value.”
CBEC Letter F.No. 341/93/2008-TRU dated October 13, 2008