Section 65(105)(z) of the
Finance Act, 1994 - Clarification regarding service tax on commission received by
Primary Dealers dealing in Government securities
Circular No.126/08/2010 - ST
F.No.332/13/2010-TRU
Government of India
Ministry of Finance
Department of Revenue
Tax Research Unit
North Block, New Delhi
10th
August
2010
To
Chief
Commissioners of Central Excise and Service Tax (All),
Director
General (Service Tax),
Director
General (Central Excise Intelligence),
Director
General (Audit),
Commissioners
of Service Tax (All),
Commissioners
of Central Excise and Service Tax (All).
Madam/Sir,
Subject:
Service tax on commission received by Primary Dealers dealing in Government Securities
regarding.
A
representation has been received seeking clarification whether service tax is leviable
on the underwriting commission received by the Primary Dealers for the auction of
Government Securities.
2.
The
matter has been examined.
Underwriting
service is taxable by virtue of section 65 (105) (z) of the Finance Act, 1994. In
the definition of taxable service, two technical terms are mentioned, namely underwriting
and underwriter. The term underwriting [section 65 (117) of the Finance Act, 1994]
has the meaning assigned to it in clause (g) of rule 2 of the Securities and Exchange
Board of India (Underwriters) Rules, 1993, which reads as follows:
underwriting means an agreement with or without conditions to subscribe to the securities
of a body corporate when the existing shareholders of such body corporate or the
public do not subscribe to the securities offered to them.
3.
The term underwriter as in section 65(116) of the Finance Act, 1994, has been borrowed
from rule 2 (f) of the Securities and Exchange Board of India (Underwriters) Rules,
1993, which reads as follows:
underwriter means a person who engages in the business of underwriting of an issue
of securities of a body corporate.
It
is thus clear that under the above definitions underwriter or underwriting is about
dealing in securities of a body corporate.
4.
The related issue requiring resolution is whether dealing in government securities
amounts to dealing in securities of a body corporate, particularly since government
securities are issued by the Reserve bank of India, which is a body corporate in
terms of section 3 (2) of the RBI Act, 1934.
5.
Government
securities are sovereign securities having zero default risk. Reserve Bank of India
only manages the issue and also auction of Government Securities on behalf of the
Government of India.
In
effect, Primary Dealers registered with the RBI (as opposed to registration with
the Securities Exchange Board of India) deal in Government Securities, issued by
the RBI on behalf of the Government of India, as a part of the central Governments
market borrowing program. The general practice is that the RBI invites bids from
the Primary Dealers, who in their bids indicate the amount to be underwritten and
the underwriting fee expected by them. RBI examines these bids and decides the amount
to be underwritten and underwriting fee to be paid to a Primary Dealer. Underwriting
Fee is also known as Underwriting Commission in common parlance. Thus the conclusion
drawn is that government securities are not securities of a body corporate.
6.
As
the service tax law stands today, service tax liability does not arise on Underwriting
Fee or Underwriting Commission received by the Primary Dealers during the course
of the dealing in Government Securities.
7.
Trade
Notice/Public Notice may be issued to the field formations accordingly.
8.
Please
acknowledge the receipt of this circular. Hindi version follows.
(J. M. Kennedy)
Director, TRU
Tel: 011-23092634
CAclubindia
