If you are trying to invest in the equity market through a sub-broker, he will tell you that he is required to pay GST on his earning. Like any business, sub-brokers also come under the GST rules and need to pay taxes as per the slabs. The new service tax regime has brought the sub-broker under GST.
Sub-brokers aren’t the direct members of the stock exchange. Instead, they work under the banner of a broking house, which qualifies them as agents under Section 2(5) of CGST Act.
Who is an agent under GST definition?
Under the sub-broker regulation 1992 issued by SEBI, a sub-broker is defined as below,
Any person/agency, who isn’t a direct member of the stock exchange, who acts of behalf of a stockbroker, assisting in buying, selling, or dealing in securities, is identified as an agent. An agent provides services to both stockbroker and investor.
An agent needs to complete the due diligence with the stockbroker and register with SEBI to extend services. Any individual qualifying under the above definition is regarded as ‘agent’ and falls under Section 2(5) of the CGST Act and needs to register without a threshold under Section 24(vii) of the CGST Act, 2017.
Any person acting as an intermediary between the clients and a broking house, therefore, needs to complete GST registration and fulfil all compliances.
Whenever the sub-broker receives a brokerage for rendering stockbroking services to clients, he needs to pay GST on it.
GST compliances and sub brokers
Agents, like any other business, need to pay GST as applicable. They are providers of stockbroking services and receive brokerage as a percentage of the total trade volume. Under GST rules, tax is applied to the brokerage earned. However, the agent isn’t required to pay any GST on any amount recovered for delays if they meet pure agent status.
If the client delays payment, the sub-broker can charge him some late fees as settlement obligation on it. Apart from that, delayed payment also attracts interest from margin trading facility. GST doesn’t apply to margin amount as it is considered as loan advances.
Tax is also applied on intra-state supply of stocks when the clients is an NRI, foreign portfolio investor, or person of foreign origin. Central and State or Union Territory taxes apply to the brokerage earned by the sub-broker for serving clients residing outside India.
But if the sub-broker has already paid the integrated tax, then he is eligible to receive a return if central and state-level charges are also levied on him. This all may sound very complicated, but the simple rule is, one amount is taxed only once. Double taxation doesn’t apply to agent brokerage.
So, what happens when the sub-broker receives margin money from the client? GST doesn’t apply to loan advances. Suppose the client pays funds or securities to the sub-broker in advances to carry out a transaction, it qualifies under 2(31) of Central GST Act 2017. It will not attract GST for sub-broker unless he transfers those to his supply book, then it will be regarded as payment for such supply.
GST on sub-broker in a nutshell
All GST compliances to sub brokers can be summarised in the following points.
- GST registration is now mandatory for all individuals working as sub-brokers
- The Rs 20 lac turnover exemption criteria under provision 22 gets nullified by sec 24
- Sub-brokers need to raise an invoice to their broker for the GST amount at the end of every month
- If the sub-broker registers for GST, he needs to pay the tax by 5thof every month
- Securities don’t qualify as goods or services and hence, are nontaxable as per sec 2(78) of the CGST Act
- GST applies to the exit load paid by the client to the broker
Regardless of whether or not the sub-broker registers under GST, the tax will still apply to the broker. Hence, it is advisable, to get GST registration done to avoid any friction with the authority and for carrying out business smoothly.