The Securities and Exchange Board of India (Sebi) may need to pay Rs.500 crore in service tax.
The budget, which made amendments to the service tax regime, said that financial regulators will be exempt from tax on the services provided by them from April 2016. Since the amendment is with prospective effect, Sebi may need to comply with a pending demand for Rs.500 crore in service tax, said two people familiar with the matter.
Sebi was slapped with this service demand in March 2015, which the market watchdog refuted saying that they were exempt as per the Sebi Act.
“The new amendments will not affect the previous tax demand. However, Sebi can take input credit in lieu of the service tax demand,” said one of the two people quoted above, a senior tax official. He spoke on the condition of anonymity.
A second finance ministry official reiterated this view without divulging details.
An email sent to Sebi on Tuesday and the Central Board of Excise and Commissions (CBEC) on Wednesday did not elicit a response till press time.
The Union budget exempted the regulators such as Sebi, insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI), pension regulator, Pension Fund Regulatory and Development Authority (PFRDA) and Employees’ Provident Fund Organization (EPFO) from the service tax prospectively starting April 2016.
A person familiar with Sebi’s thinking said that Sebi has explained its stance to the ministry and the ball is in government’s court. “So far Sebi has not paid the amount and will go by the provisions in Sebi Act,” he said requesting anonymity.
Experts are of the view that Sebi is liable to pay the amount sought by the tax department.
“According to the Finance Bill, the exemption has been given prospectively, with effect from 1 April 2016. Unless the law clearly says its applicability is to be retrospective, it may not be applied from an earlier date,” said Vaneesa Agrawal, securities lawyer and ex-Sebi officer.
The tax demand was raised against Sebi for the period between 2012 and 2015. The Rs.500 crore tax demand included penalty and interest. Delay up to six months attracts 18% interest while it is 30% for more than a year.
In response to the tax demand, Sebi had argued that it is not liable to pay service tax according to provisions of Section 25 of the Finance Act. The section states that from the date of Sebi’s constitution to the date of establishment it is not liable to pay wealth tax, income tax or any other tax on their wealth, income, profits or gains derived.
However, in August 2015, the ministry wrote back saying that Sebi is liable to pay service tax for the services it provides. The government’s view was based on the negative list of services released by the government in 2012. Regulators such as Sebi, IRDA, PFRDA and EPFO were not a part of the negative list even though the Reserve Bank of India was.
Sebi provides services to stock exchanges, its members, brokers, and investors for processing of IPOs, debt issues, mutual fund, new fund offers and other services, including informal guidance to companies.
As per Sebi annual report, in 2014-15, Sebi received total fees of Rs.322.85 crore as against Rs.175.35 crore in 2013-14.
“The amendment in the service tax regime is prospective in nature and any demands raised in the past will not be impacted because of this exemption. If the intent is to give complete exemption from service tax demand then the nature of amendment should be retrospective which hasn’t happened in this case,” said Amit Kumar Sarkar, Partner, Grant Thornton India LLP (Indirect Tax).
M.S. Mani, senior director, Deloitte shares that view.
“The exemption notification is very specific and grants an exemption to these regulatory bodies from the next financial year. So, any previous service tax demand notice cannot be withdrawn. Whether the regulator needs to pay for the previous period would need to be adjudicated on merit,” said Mani.
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