CBIC has issued a clarification on applicability of GST on supply of securities under the SEBI’s Securities Lending Scheme (SLS) 1997, vide GST Circular 119/38/2019.
CBIC GST Circular 119/38/2019 dt. 11/10/2019: CBIC clarification on taxability of supply of securities under the SEBI’s Securities Lending Scheme, 1997
Stakeholders have asked CBIC to clarify whether the lender’s supply of securities under SEBI’s Securities Lending Scheme (SLS) 1997 is taxable under GST.
The SEBI has prescribed SLS for the purpose of facilitating securities lending and borrowing through an approved intermediary under an agreement for a specified period with the condition that the borrower 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. Because there is no direct agreement between the lender and borrower, there is anonymity.
The Lender is a person who deposits securities registered in his name or the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the scheme and earns a lending fee in exchange for lending their securities to the borrowers. Furthermore, a Borrower is someone who borrows securities under the scheme from an approved intermediary. Furthermore, an Approved Intermediary is a person who has been duly registered by the SEBI under the guidelines/scheme through whom the lender will deposit securities for lending and the borrower will borrow securities.
The CBIC has reiterated that, for the purposes of GST, the term “securities” has been defined in Section 2(101) of the CGST Act to have the same meaning as defined in Section 2(h) of the Securities Contracts (Regulation) Act (SCRA), 1956. Section 2(102) defines “services” as anything other than goods, money, and securities; however, services include activities relating to the use of money or its conversion by cash or any other mode for which a separate consideration is charged, as well as facilitating or arranging securities transactions.
As a result, the CBIC has clarified that “Securities” are not covered in the definitions of goods in section 2(52) and services in section 2(102) of the CGST Act. As a result, a transaction in securities that involves the disposal of securities is not a supply under GST and is thus not taxable. Furthermore, CBIC has stated that the clarification added to the definition of services with effect from 01/02/2019 to include “facilitating or arranging transactions in securities” is merely clarifying and has no bearing on the taxability of the service of lending securities.
As a result, the activity of ‘lending of securities’ cannot be treated as a ‘transaction in securities’ because it does not involve ‘disposal of securities’ as defined by the SEBI Scheme. The lender temporarily lends securities held by him to a borrower and charges the borrower a lending fee for the privilege. The borrower of securities may sell or buy these securities and is required to return the lent securities within a specified time frame. Since 01/07/2017, the lending fee charged to securities borrowers has the character of consideration, and this activity is taxable in GST. Furthermore, the activities of intermediaries who facilitate the lending and borrowing of securities for a commission or fee are taxed separately.
The supply of lending securities under the scheme is classified as heading 997119 and is subject to GST at the rate of 18% under Sl. No. 15(vii) of Central Tax Rate Notification 11/2017, as amended from time to time.
GST is payable under forward charge by the lender from 01/07/2017 to 30/09/2019. The type of tax due will be IGST. However, if the service provider has already paid CGST/ SGST/ UTGST on the supply as an intra-state supply, such lenders are not required to pay IGST in lieu of such GST payments. However, beginning on October 1, 2019, the borrower of securities will be required to discharge GST in accordance with Sl. No. 16 of Central Tax Rate Notification 22/2019 under the reverse charge mechanism (RCM). The type of GST to be paid is IGST under RCM.