The recent order by the Hyderabad bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) is expected to bring greater clarity and certainty to traditional stock broking firms on the tax treatment of delayed payment charges recovered from clients for share purchases, according to experts. In its final order dated May 15, the Tribunal held that such charges are essentially in the nature of financing interest and do not attract service tax as a “declared service”.
The ruling is significant because the bench relied on a 2011 circular of the Central Board of Excise and Customs (CBEC) under the service tax regime — now known as the Central Board of Indirect Taxes and Customs (CBIC) — as well as a 2019 circular issued under the Goods and Services Tax (GST) regime while deciding the pre-GST service tax dispute. According to experts, while the ruling is in a service tax case, it will also lend persuasive support and greater certainty to similar disputes under GST, as the Tribunal drew from the 2019 CBIC circular on penal interest.
M/s Steel City Securities Ltd, a Visakhapatnam-based stock broker, was collecting delayed payment charges from clients who failed to make timely payments, both for share purchases executed on their behalf and for demat account maintenance charges. The tax department had demanded service tax on these charges, treating them as consideration received for “tolerating an act” under Section 66E(e) of the Finance Act, 1994. The company challenged the demand before the Tribunal.
Appearing for the appellant, counsel argued that the delayed payment charges recovered on share purchase transactions were in the nature of interest on funds advanced by the broker and therefore not liable to service tax. Any charge in the nature of penal interest could not form part of the refraining acts, and this position is clarified even under the GST regime, he said.
According to a former CBIC chairman, the order appears to be consistent with earlier jurisprudence and the CBIC’s clarification that financing interest is not chargeable to tax as a supply by itself, unless it has a direct nexus with the underlying supply. The ruling should bring greater legal certainty to the stock broking and securities trading sector, especially with regard to trading-related delayed payment charges.
“The positive impact is likely to be more meaningful for brokers with a larger margin funding book, while the overall industry impact may remain limited. On the other hand, delayed payment charges on demat service fees are directly linked to the supply of services and are therefore taxable along with the consideration for such supply,” he said.
According to an tax expert, the order represents a welcome decision, as it considers the true substance of the transaction rather than merely its form. The authorities had sought to tax all forms of penalties by characterising them as acts of toleration solely based on their nomenclature as penal charges.
“In the present case, however, the charge was levied on account of delay, which is more akin to interest on delayed payment and, accordingly, has been rightly held to be non-taxable. Further, reliance on a GST circular to determine a service tax matter constitutes a precedent in itself and may prove valuable in resolving several legacy issues that remain open, notwithstanding having been clarified under the GST regime,” he added.
