Tax conundrum: FPIs uneasy after 18% GST on regulatory services

Set to approach Sebi, finance ministry for clarification

The Centre’s recent move to impose Goods and Services Tax (GST) on services rendered by the markets regulator, Securities and Exchange Board of India (Sebi), has rattled foreign portfolio investors (FPIs). They fear the decision could result in GST on “export of services”, which is currently a zero-rated supply.

“Custodians of FPIs will be taking it up with the market regulator and the Ministry of Finance (MoF), and will seek clarity on the applicability of the levy,” said two people privy to the matter.

“GST levy of 18 per cent is steep. But more importantly, it is a matter of principle. GST is a local tax, while services offered to FPIs are for entities residing outside the country. So, in other words, GST is getting applied to the export of services. This may lead to more complications for FPIs in the future,” said one of the sources cited above.

Under the GST rules, the export of goods or services has been treated as a zero-rated supply. This means that goods or services exported shall be relieved of GST upon them either at the input stage or at the final product stage.

Recently, the market regulator clarified that all market infrastructure institutions, including stock exchanges and persons dealing in the securities market, would have to pay 18 per cent GST on the fees charged by it. The clarification came after the government decided to withdraw the exemption granted to services by Sebi.

As a result, custodians will have to pay GST on FPI registration and other fees that they pay to Sebi on behalf of overseas investors.

According to experts, unlike domestic market intermediaries, FPIs do not have an output tax liability and will not be able to claim credit for this levy, resulting in an additional cost to them.

“Due to this change, regulatory fees charged by Sebi, such as registration fees, filing fees and other charges, will now be liable to GST. FPIs do not have an output tax liability and will not be able to claim tax credit. The regulator turnover charges were, however, subject to GST since inception and are not impacted due to this change,” said Bhavin Shah, partner, PwC.

At present, the FPI registration fee (payable to the Sebi) is $3,000 for Category I and $300 for Category II. This fee is not payable by international or multilateral agencies, such as the World Bank, and other institutions eligible for privileges or immunity from payment of tax and duties. The fee is payable by an FPI upon the expiry of the licence every three years.

 “While the charges levied by Sebi would now attract GST and all securities market intermediaries should now be prepared, it is essential to clarify whether charges levied on overseas entities remain zero-rated,” said M S Mani, partner, Deloitte India.

A rough estimation suggests this move may fetch about Rs 13 crore from foreign investors.

The tax was imposed following the recommendation of the GST Council, which met in June to withdraw the exemption granted to services by Sebi. The same was notified on July 13.

The council approved the ministerial panel interim report, which suggested that services rendered by regulators, such as RBI, Irdai, Sebi, FSSAI, and GST Network, should be taxed.