Central Tax Circulars

CGST Circular 119/2019

To,

The Principal Chief Commissioners/ Chief Commissioners/ Principal
Commissioners/ Commissioner of Central Tax (All) /

The Principal Director Generals/ Director Generals (All)

Madam/Sir,

Subject: Clarification regarding taxability of supply of securities under Securities
Lending Scheme, 1997 – reg.

1) Trade has requested clarification on whether the supply of securities under
Securities Lending Scheme, 1997 (“Scheme”) by the lender is taxable under GST.

2) Securities and Exchange Board of India (SEBI) has prescribed the Securities
Lending Scheme, 1997 for the purpose of facilitating lending and borrowing
of securities. Under the Scheme, lender of securities lends to a borrower
through an approved intermediary to a borrower under an agreement for a
specified period with the condition that the borrower will return equivalent
securities of the same type or class at the end of the specified period along
with the corporate benefits accruing on the securities borrowed. The
transaction takes place through an electronic screen-based order matching
mechanism provided by the recognised stock exchange in India. There is
anonymity between the lender and borrower since there is no direct agreement
between them.

2.1 The lenders earn lending fee for lending their securities to the borrowers.
The security lending mechanism is depicted in the diagram below:

2.2 In the above chart:

(i) Lender is a person who deposits the securities registered in his name or in
the name of any other person duly authorised on his behalf with an approved
intermediary for the purpose of lending under the scheme.

(ii) Borrower is a person who borrows the securities under the scheme through
an approved intermediary.

(iii) Approved intermediary is a person duly registered by the SEBI under the
guidelines/scheme through whom the lender will deposit the securities for
lending and the borrower will borrow the securities;

3) It may be noted for the purpose of GST Act, “securities” shall have the same
meaning as assigned to it in clause (h) of section 2 of the Securities
Contracts (Regulation) Act, 1956 (Section 2(101) of CGST Act). The definition
of services as per Section 2(102) of the CGST Act, is extracted as below: –

“services” means anything other than goods, money and securities but includes
activities relating to the use of money or its conversion by cash or by any
other mode, from one form, currency or denomination, to another form, currency
or denomination for which a separate consideration is charged;

Explanation.––For the removal of doubts, it is hereby clarified that the
expression “services” includes facilitating or arranging transactions in
securities;

4) Securities as defined in clause (h) of section 2 of the Securities Contracts
(Regulation) Act, 1956 are not covered in the definition of goods under
section 2(52) and services under section 2(102) of the CGST Act. Therefore, a
transaction in securities which involves disposal of securities is not a supply
in GST and hence not taxable.

4.1 The explanation added to the definition of services w.e.f. 01.02.2019 i.e.”
includes facilitating or arranging transactions in securities” is only
clarificatory in nature and does not have any bearing on the taxability of the
services under discussion (lending of securities) in past since 01.07.2017 but
relates to facilitating or arranging transactions in securities.

4.2 The activity of lending of securities is not a transaction in securities as
it does not involve disposal of securities. The clause 4 of para 4 relating to
the Scheme under the Securities Lending Scheme, 1997 doesn’t treat lending of
securities as disposal of securities and therefore is not excluded from the
definition of services.

4.3 The lender temporarily lends the securities held by him to a borrower and
charges lending fee for the same from the borrower. The borrower of securities
can further sell or buy these securities and is required to return the lended
securities after stipulated period of time. The lending fee charged from the
borrowers of securities has the character of consideration and this activity is
taxable in GST since 01.07.2017.

4.4 Apart from above, the activities of the intermediaries facilitating lending
and borrowing of securities for commission or fee are also taxable separately.

5) The supply of lending of securities under the scheme is classifiable under
heading 997119 and is leviable to GST@18% under Sl. No. 15(vii) of Notification
No. 11/2017- Central Tax (Rate) dated 28.06.2017 as amended from time to time.

5.1 For the past period i.e. from 01.07.2017 to 30.09.2019, GST is payable
under forward charge by the lender and request may be made by the lender
(supplier) to SEBI to disclose the information about borrower for discharging
GST under forward charge. The nature of tax payable shall be IGST. However, if
the service provider has already paid CGST / SGST / UTGST treating the supply
as an intra-state supply, such lenders shall not be required to pay IGST again
in lieu of such GST payments already made.

5.2 With effect from 1st October, 2019, the borrower of securities shall be
liable to discharge GST as per Sl. No 16 of Notification No. 22/2019-Central
Tax (Rate) dated 30.09.2019 under reverse charge mechanism (RCM). The nature of
GST to be paid shall be IGST under RCM.

6) Difficulty if any, in the implementation of this circular may be brought to
the notice of the Board.