Home >Market >Stock-market-news >Sebi slapped with Rs75 crore service tax demand

Mumbai: The service tax department has slapped a tax notice of 75 crore on the Securities and Exchange Board of India (Sebi). The notice was sent to the capital market regulator in the first week of April, two people familiar with the development said.

The Union Budget exempted regulators such as Sebi, the Insurance Regulatory and Development Authority of India (IRDAI), Pension Fund Regulatory and Development Authority (PFRDA) and Employees’ Provident Fund Organisation (EPFO) from service tax prospectively, with effect from April 2016.

The tax demand served on Sebi is applicable to previous years. “Since the amendment is with prospective effect, Sebi will need to comply with a pending demand for 75 crore in service tax," said one of the two people cited above, on condition of anonymity.

A second person added that the demand follows a final assessment of Sebi’s book of accounts.

“The service tax department had earlier estimated the service tax dues would be to the tune of 500 crore, but a final assessment of Sebi’s books of accounts had led to a service tax notice of 75 crore," he said.

An email sent to Sebi and the Central Board of Excise and Commissions (CBEC) on Tuesday had not elicited a response as of press time.

The service tax notice is for the period starting July 2012 till March 2015. The first person quoted above said a second service tax notice will be sent, seeking service tax dues for the period from April 2015 to March 2016. Sebi was first slapped with the service demand in March 2015. The market watchdog said at the time that it was exempt from the tax under the Sebi Act.

According to a third person familiar with the regulator’s thinking, the Sebi Act and Section 25 of the Finance Act clearly exempt services provided by Sebi from the tax levy. The regulator denied the tax claim on these grounds. “Recently, during the interaction with the finance minister, Sebi chairman U.K. Sinha explained Sebi’s stance," the third person said.

Section 25 of the Finance Act 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 wealth, income, profits or gains derived.

Sebi provides services to stock exchanges, their members, brokers and investors for processing of initial public offerings, debt issues, mutual funds, new fund offers and other services, including informal guidance to companies. According to Sebi’s annual report, in 2014-15, it received total fees of 322.85 crore, compared with 175.35 crore in 2013-14.

“Sebi is an autonomous body and as a thumb rule there is a general perception that regulators do not provide services for profit but rather for public interest. However, in this case, it seems that the service tax department has clearly identified the services that are liable to a service tax levy," said Amit Kumar Sarkar, partner at consultancy Grant Thornton India.

“As there is no specific exemption granted to Sebi from service tax, the only other option left with the market regulator is to approach the government for a retrospective exemption," Sarkar added.

The services provided by Sebi are very similar to the services provided by the Reserve Bank of India (RBI) to primary dealers and bond market participants.

However, the service tax regime grants the central bank a specific exemption from this levy by including it in a negative list. The concept of a negative list was introduced in 2012; it is a master list of services that are not liable to pay service tax.

“Earlier, in the absence of a specific exemption and non-inclusion in the negative list, the fee charged by Sebi was arguably liable to a service tax levy. The proposed exemption to regulators such as Sebi from service tax further substantiated the argument that in the absence of such an exemption earlier, the fee charged by the regulator was amenable to a service tax levy and, hence, the demand," said Tejesh Chitlangi, partner at the law firm IC Legal.

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