Service tax on mutual fund sub broker

[ROHIT GOEL]

One of the clients was providing sub broking services to mutual fund brokers and received commission/sub brokerage on the same.

As per the client, the sub brokerage in its case was exempt from service tax under sno 29(a) of Notification no. 25/2012 which covers services provided by sub broker to stock broker.

The definition of Sub broker as per the NN is deemed to be same as per Sebi regulations as per which it means any person assisting a stock broker/trading member in transactions in securities. In turn, securities also include mutual funds.

However stock broker as per the same includes person who has trading rights in a stock exchange. The mutual fund broker to whom services of sub brokerage were provided, was not having trading rights but instead is only registered as MF advisor with AMFI as per law.

Therefore opinion is requested whether the service tax exemption would be available or not in case of mutual fund sub broker?

[Rajagopalan Ranganathan]

Sir,

With effect from 01-04-2015 the service provided by mutual fund sub broker is liable to service tax. However between the period 1.4.2015 to 30.3.2016 the service tax is payable by mutual fund or asset management company, receiving the service, under reverse charge vide rule 2 (1) (d) (EEA) of Service Tax rules and Sl. No. 1 B of Notification No. 30/2012-ST dated 26.6.2012. . However the entry 1B was omitted with effect from1.4.2016 vide Notification. 18/2016 - dated 1-3-2016. With effect from 1.4.2016 service tax is payable on forward chgarge basis

[ROHIT GOEL]

Dear Sir,

Thank you for your response.

However, as per the notification applicable for FY 2015-16, RCM was applicable only to services provided by agent to the AMC/Mutual fund company. In this case, services have been provided by sub broker/agent to Broker and in my opinion, this would not be covered by RCM.

However, the client contends that it is covered by exemption under S.No 29 wherein exemption is provided to sub broker providing services to stock broker. The definiton of sub broker is said to be same as per SEBI regulations and on consideration of same, client is covered as sub broker under the Act. Further, as per SEBI mandate, client has cleared AMFI Exam and obtained NISM Certification.

However, my apprehension is that the notification does not specifically include mutual fund sub-brokers under the same and uses words stock broker, which as per SEBI Act is defined to person having trading rights over Stock exchange.

So in such case, whether the client's plea that it is exempted from service tax apply or not? I have accessed decisions of CESTAT Benches from earlier years wherein it has been held that sub broker should not be made liable to pay ST on which tax has already been paid/collected from broker. However there seems to be lack of clarity in the law.

AI Summary

Client Challenges Service Tax on Mutual Fund Sub-Broking Services; Cites Exemption Under Notification No. 25/2012 A client providing sub-broking services to mutual fund brokers claims exemption from service tax under Notification No. 25/2012, which exempts services by sub-brokers to stock brokers. The client argues that the definition of sub-broker includes those assisting in securities transactions, which covers mutual funds. However, the mutual fund broker lacks trading rights, being registered only as an MF advisor. A response clarified that from April 1, 2015, mutual fund sub-broker services are taxable, initially under reverse charge until March 30, 2016, and subsequently on a forward charge basis. The client disputes the applicability of reverse charge, citing exemption for sub-brokers.