FAQ : A member unit asked…
Can I take input ITC of GST paid on the Shares Contract note ?
ITC is possible ?
Query in Detail
A company is registered in GST. Has normal 18% GST on service income in normal course. Fine….. Now it has started purchasing shares in the stock market.. and pays GST on each contract note..
The query is that, can it take the input of his GST ITC on its contract notes.. and use them against the normal GST on its normal sales ?
Option 1 : Retail investor
No, a company cannot take an Input Tax Credit (ITC) on the GST paid on stock market contract notes to offset the GST on its normal sales. ❌
Reason ? Why you can’t claim ITC on stock market transactions ?
The core principle of ITC under GST is that it’s available only for taxes paid on goods and services used for making taxable supplies.
The main reasons why ITC can’t be claimed on GST paid on contract notes are:
- Shares are not ‘goods’ or ‘services’ under GST: The GST Act specifically excludes securities (which includes shares) from the definitions of both “goods” and “services.”
- Share trading is an ‘exempt supply’: Since securities aren’t considered goods or services, their sale doesn’t fall under GST. Therefore, it’s considered an “exempt supply.”
You cannot claim ITC on any input (goods or services) used for making an exempt supply. The GST paid on the contract note (which is levied on brokerage, transaction charges, etc.) is a cost for an exempt supply.
What to do with the GST paid on contract notes
The GST paid on brokerage and other charges on your stock market contract notes should be treated as a business expense. You can claim this amount as an expense when filing your Income Tax Return, which helps reduce your taxable income.
Option 2
Can input tax credit be claimed on the GST paid for Stock broker services ? for Brokers ? Traders ?
yes, if you are in “business” of Shares purchase and sale ?
Yes, the input tax credit for the GST paid for Broker’s services can be claimed if the following conditions are met:
- The trading services are used for business purposes, not by an end-user (retail investor).
- The GST registration is linked to the same PAN as the demat account.
To include the GST number on the contract note and other invoices from your broker, please provide the GST registration certificate to them.
What are side effects ?
on Income tax ? increase or decrease ?
in case of business income in case of a company in new regime….you pay full 22 % tax in new regime in company and 30% or more in case of Individual. Plus surcharge and cess.
Whereas in case of LTCG investment as retail investor you pay only 12.5% tax on that + Plus surcharge and cess.
So, Long term…… 30% vs 12.5% ( large difference)
and
And, in Short term…… 22% vs 20% ( very minor difference)
so, you get GST input, but you pay higher income tax ,so effect need to be seen case by case
What are side Benefit ? Business expenses are claimed or not ?
so ? Income tax ? can get decreased ?
Yes, if you have staff, office, rent of office, cars, car maintenance , car insurance, all office expenses can be adjusted in the Business Profit and Loss Account
So, take care please, Each case may be different
if you are doing on large scale, go ahead as business and higher rate of tax, but net of all expenses. So, if your expenses are higher, then business is the way to go
if small scale, then being investor is better, leave the GST and pay lower tax rate.
More writeup on the same
Yes, a company can treat its shares trading as a business. This is a common practice, particularly for firms that actively trade securities with the intent of making a profit from short-term price fluctuations, rather than holding them for long-term investment.
The classification of trading activity as a business or an investment depends on factors such as the frequency, volume, and purpose of the trades. For tax purposes in India, this distinction is crucial and has different implications under Income Tax, GST, and TDS.
Income Tax
This is where the most significant differences are seen. Classifying share trading as a business or capital gains has distinct advantages and disadvantages.
Benefits of Business Income
- Deductible Expenses: The company can deduct all expenses incurred for the purpose of the trading business. This includes brokerage fees, transaction charges, demat charges, internet bills, subscription fees for trading software, and even a portion of rent and electricity if a dedicated office space is used.
- Set-off and Carry Forward of Losses: Business losses from trading can be set off against other business income. If the losses cannot be fully set off in the same year, they can be carried forward for up to eight subsequent years to be set off against future business profits. This is a significant advantage, especially in a volatile market.
- No Tax on Long-Term Capital Gains (LTCG): Since all trading is classified as business activity, there’s no distinction between short-term and long-term capital gains, so the tax on LTCG doesn’t apply.
Demerits of Business Income
- Higher Tax Rate: Business income is taxed at the company’s slab rates, which may be higher than the concessional rates for capital gains. For example, short-term capital gains on listed shares are taxed at a flat 15% (under Section 111A), while long-term capital gains above ₹1 lakh are taxed at 10% (under Section 112A). A company’s business income is taxed at the regular corporate tax rate.
- Mandatory Audit: If a company’s trading turnover exceeds certain limits (e.g., ₹10 crore if more than 95% of transactions are digital, otherwise ₹2 crore), a tax audit is mandatory, adding to compliance costs. Also, if there’s a loss or the profit is less than 6% of the turnover, a tax audit is required.
- Compliance Burden: The company needs to maintain proper books of accounts and file the appropriate Income Tax Return (ITR-3) for “Profits and Gains from Business or Profession,” which is more complex than the ITR for capital gains (ITR-2).
GST (Goods and Services Tax)
The implications of GST are simpler because securities are specifically excluded from the definition of “goods” and “services” under the GST Act.
Benefits
- No GST on Transaction Value: The value of the shares traded is not subject to GST. Therefore, even if a company has a very high trading turnover, it doesn’t need to pay GST on that turnover. This means no GST is applicable on the sale or purchase of shares.
Demerits
- No Input Tax Credit (ITC): Since the company is not making a taxable “supply” of goods or services, it generally cannot claim input tax credit on the GST paid on its business expenses (like brokerage fees, software subscriptions, or professional fees) that are directly related to its trading activity.
TDS (Tax Deducted at Source)
TDS provisions apply to various payments, but generally, there’s no TDS on the sale or purchase of shares on a recognized stock exchange.
Benefits
- No TDS Liability: As a company trading shares, you are not required to deduct TDS on the payments made for buying shares.
- Brokerage Payments: While the company doesn’t deduct TDS on the share value, it’s important to note that TDS provisions under Section 194H may apply to brokerage paid to a broker if it exceeds the specified threshold. However, this is a procedural requirement that is generally handled by the company’s accounting department and isn’t a demerit of the trading business itself.
Demerits
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TDS on Dividends and Interest: The company may be subject to TDS on income it receives, such as dividends (if applicable) or interest from its investments, as per the relevant sections of the Income Tax Act. However, this is a standard tax deduction and isn’t a direct demerit of a trading business per se.
Good thing to learn for all the students and all CA Team members in the MLG Associates. Rollout of IND-AS 101 begins
