Issue of equity shares at premium whether exempted service? (whether this activity is 'trading in securities')

[Yatin Bhopi]

Dear exeprts

We are manufacturer and public limited company. recently we have gone through excise audit.

We have securities premium account where premium received on issue of equity share is credited. i.e. for eg. if the face value of shares is ₹ 10 and if we issue to shareholder at ₹ 15, ₹ 5 is the premium received and credited to securities premium account.

Now auditors view is that, this is exempted service (trading in securities) and they are asking us to reverse the CENVAT credit according to CCR 6 (3).

Please let me know the legal position and your view in this matter.

[Rajagopalan Ranganathan]

Sir,

Please inform what are the common input services you are using? Since trading in securities is in the negative list you are not liable to pay service tax on trading. Since no credit of service tax paid on input services is availed by you there is no question of reversing any cenvat credit taken.

[Ganeshan Kalyani]

By issuing shares you have not provided any service. in fact it is trading I.e. buying and selling of shares where no service tax is involved by any means. Hence no question of reversing the input credit.

[DR.MARIAPPAN GOVINDARAJAN]

The trading of securities is an exempted service. The company is a manufacturer. In such a situation the company has to maintain separate accounts for exempted service and also other aspects. The auditor may ask the company to reverse the credit if the company may not maintain separate accounts for exempted services as per Rule 6. Further Rule 6 (3) provides that if the manufacturer does not opt to maintain separate accounts shall pay 7% of the value of exempted services.

[Yatin Bhopi]

Dear Sir

We are not in business of trading in securities. Trading means buying and selling. In our case the share premium is collected by issue of new shares at the premium either to the existing shareholders on right basis or to the promoter on preferential basis and there was no purchase and sale of securities involved Hence it will not treated as a trading in securities

[Ganeshan Kalyani]

Mr.Yatin Bhopi In either way you are not liable for service tax. Hope it is clear.

AI Summary

Trading in securities is exempt; issuing shares at premium is not trading and does not attract service tax. Premium received on issue of new equity shares is not treated as trading in securities and does not by itself attract service tax. Trading in securities is an exempted / negative list service, and where exempted services are rendered a manufacturer must maintain separate accounts or follow the prescribed apportionment/payment rules for exempted activities; reversal of CENVAT credit arises only if input credits relate to exempted services or accounting segregation is not maintained.