taxsutra All rights

reserved

GST implications on transactions in securities - Part I

Date: June 11,2019

Nishant Shah, Partner, ELP

The article has been co-authored by Mr. Supreme Kothari (Associate Partner) and Mr. Vinit Ashar
(Associate)

‘Securities’ have been explicitly excluded from the purview of GST, by virtue of its exclusion from the
definition of ‘goods’ and ‘services’, as contained in Section 2(52) and Section 2(102) of the CGST Act
respectively. As per Section 2(101) of the CGST Act, the term securities derive its meaning from Section 2(h)
of the Securities Contracts (Regulation) Act, 1956, in terms of which, securities inter alia include shares,
scrips, stocks, bonds, derivative instruments etc.

However, even while not being a taxable transaction itself, transaction in securities has several other
implications, in terms of the GST law. This arises pursuant to treating of such transaction as ‘exempted’
supplies for the purpose of determination of admissible input tax credit in hands of the entity.

An analysis in this regard, which is set out below, delves into the applicable GST provisions and critically
evaluates as to whether the said provisions explicitly necessiciate reversal of input tax credit associated with
transactions in securities and highlights the visible gaps in legislation.

Whether the GST provisions explicitly require reversal of Input tax credit (‘ITC’)

Knowing well that several businesses engage in transactions in securities, even while it is not its core
business and that such transactions are undertaken for efficient deployment of unused funds or for hedging
commodity price and currency exposures, the GST law has sought to ensure that ITC attributable to such
activities undergo reversal.

Section 17(2) and Section 17(3) of the CGST Act read with Explanation 2(a) to Chapter V of the CGST Rules,
seek to achieve this, relevant provisions of which are extracted below-

Provision Relevant extract

Where the goods or services or both are used by the registered person partly
for effecting taxable supplies including zero-rated supplies under this Act or
under the Integrated Goods and Services Tax Act and partly for effecting
Section 17(2)
exempt supplies under the said Acts, the amount of credit shall be restricted
to so much of the input tax as is attributable to the said taxable supplies
including zero-rated supplies
The value of exempt supply under sub-section (2) shall be such as may be
prescribed, and shall include supplies on which the recipient is liable to pay
Section 17(3)
tax on reverse charge basis, transactions in securities, sale of land and,
subject to clause (b) of paragraph 5 of Schedule II, sale of building
Explanation 2(a) For the purposes of this Chapter, ….(2) for determining the value of an
to Chapter V of exempt supply as referred to in sub-section (3) of section 17-… (b) the value
the CGST Rules of security shall be taken as one per cent. of the sale value of such security.

‘Securities’ whether exempt

While the intention of the Government is clearly reflected in the aforesaid provisions, the application thereof
needs to be examined. It is noted that Section 17(2) of the CGST Act casts a restriction on availing ITC to the

Page 1 of 3
taxsutra All rights
reserved

extent it is attributable to an ‘exempt supply’. As per Section 2(47) of the CGST Act, the term ‘exempt
supply’ ‘means’ supply of goods or services which are exempted or which attract nil rate of GST and includes
non-taxable supply. Non-taxable supply is further defined under Section 2(78) to ‘mean’ such supply on
which no tax is leviable. Therefore, to constitute an exempt supply/non-taxable supply of goods or services,
the pre-requisite test of being a supply of either has to be met. Since ‘securities’ find an exclusion from the
ambit of ‘goods’ and ‘services’ itself, the question of it qualifying as an exempt or a non-taxable supply
would not arise, more so when the said terms are exhaustively defined.

The question which arises is, whether Section 17(3) does enough to overcome the limitation placed under
Section 17(2), so as to achieve the legislative intent. Unfortunately, a plain reading of the said provision
suggests that it fails to get the job done. As evident, the said provision is merely assigned the task of
determining ‘value of exempt supply’ under sub-section (2), however it exceeds such authority and attempts
placing therein ‘transactions in securities’, even when the same does not constitute a supply in the first
place. A notwithstanding clause or a deeming fiction, stretching/expanding the scope of the term ‘exempt
supply’ to include within its ambit ‘transactions in securities’ could have unequivocally empowered the
legislature to neutralise ITC attributable to the said activity.

Moreover, Rule 42 of the CGST Rules, which have been issued in exercise of powers conferred under Section
17(6) of the CGST Act i.e. with the objective of prescribing ‘the manner in which the credit referred to in sub-
sections (1) and (2) may be attributed’, restricts its applicability only to ‘exempted supplies’ and does not
explicitly refer to ‘transactions in securities’. While a delegated legislation is not decisive in determining
legislative competence, yet the gap visible therein highlight the failure of legislature in putting things in
order.

Quite clearly, there is an ambiguity as to whether the law, as drafted, requires ITC reversal for transactions
in securities. It may therefore be relevant to refer to the findings of the Constitution Bench of the Hon’ble
Supreme Court in the case of Commissioner of Cus. (Import), Mumbai vs. Dilip Kumar & Company [2018
(361) E.L.T. 577 (S.C.)], wherein it was inter alia held as under-

‘43. There is abundant jurisprudential justification for this. In the Governance of rule of law by a written
Constitution, there is no implied power of taxation. The tax power must be specifically conferred and it
should be strictly in accordance with the power so endowed by the Constitution itself. It is for this reason
that the Courts insist upon strict compliance before a State demands and extracts money from its citizens
towards various taxes. Any ambiguity in a taxation provision, therefore, is interpreted in favour of the
subject/assessee. The statement of law that ambiguity in a taxation statute should be interpreted strictly and
in the event of ambiguity the benefit should go to the subject/assessee may warrant visualizing different
situations. For instance, if there is ambiguity in the subject of tax, that is to say, who are the persons or
things liable to pay tax, and whether the revenue has established conditions before raising and justifying a
demand. Similar is the case in roping all persons within the tax net, in which event the State is to prove the
liability of the persons, as may arise within the strict language of the law. There cannot be any implied
concept either in identifying the subject of the tax or person liable to pay tax. That is why it is often said that
subject is not to be taxed, unless the words of the statute unambiguously impose a tax on him, that one has
to look merely at the words clearly stated and that there is no room for any intendment nor presumption as
to tax. It is only the letter of the law and not the spirit of the law to guide the interpreter to decide the liability
to tax ignoring any amount of hardship and eschewing equity in taxation. Thus, we may emphatically
reiterate that if in the event of ambiguity in a taxation liability statute, the benefit should go to the
subject/assessee.

Two points that emerge from the aforesaid judgment are:

In interpreting a taxing statute, there is no room for intendment or presumption and that it has to be
interpreted only on the basis of language employed, and,

Any ambiguity in taxing provisions has to be interpreted in favour of the assessee.

However, an interpretation that there is no requirement for reversing ITC attributable to transactions in
securities would render the applicable extract of Section 17(3) redundant, which interpretation would be
contrary to the settled law, inter alia in terms of the decision of the Hon’ble Supreme Court in the case of
CCE, Calcutta vs. Hindustan Petroleum Corpn. Ltd. [2005 (189) E.L.T. 258 (S.C.)] , that an interpretation
which ignores words or which renders words superfluous, cannot be taken.

A reference may also be made to parallel provisions that prevailed under the erstwhile CENVAT Credit Rules,
2004 (‘CCR’), wherein a similar intention was seamlessly carried through. Under the said rules, Explanation 3
to Rule 6 of the CCR explicitly provided that for the purposes of the said rules, ‘exempted services’ shall
include an activity, which is not a ‘service’ as per section 65B(44) of the Finance Act, 1994 i.e. a transfer of
Page 2 of 3
taxsutra All rights
reserved

title in ‘goods’ (defined to include securities).

To conclude, there is a visible gap between the intent and the letter of law under the present GST law, which
may inevitably lead to litigation and possibly, in which case, another retrospective amendment may be on
the anvil.

Page 3 of 3