TAXABILITY OF FORWARD CONTRACTS

[Dr. Sanjiv Agarwal]

Service tax was imposed on forward contract services rendered by any member of a registered or recognized association by the Finance Act, 2004 with effect from 10th September, 2004. The gross amount charged (brokerage and service charges) to any person in relation to forward contract services is chargeable to service tax, i.e. services provided by member of registered or recognized association to any person.

Meaning of Forward Contract

Section 65(46a) defines 'forward contract' as under -

"forward contract has the meaning assigned to it in clause (c) of section 2 of the Forward Contracts (Regulation) Act 1952".

Section 2(c) of the Forward Contracts (Regulation) Act 1952, defines forward contract as under-

"forward contract means a contract for the delivery of goods and which is not a ready delivery contract".

It may be noted that for commodities which are notified under the Forward Contracts (Regulation) Act, 1952 (FCRA), forward contracts can be entered into only through the members of association recognized under FCRA. For all other commodities, future contracts can be entered into by member of association registered with Forward Market Commission.

Meaning of Recognized Association

Section 65(89a) defines 'recognized association' as under-

'Recognized association' has the meaning assigned to it in clause (j) of section 2 of the Forward Contracts (Regulation) Act 1952'.

Section 2(j) of Forward Contracts (Regulation) Act, 1952 defines recognized association as under-

"'Recognized association' means an association to which recognition for the time being has been granted by the Central Government under section 6 in respect of goods or classes of goods specified in such recognition".

These associations should be recognized under FCRA and their members are eligible to issue contracts for forward deals of goods specified in the Act. The recognized association can deal only in specified goods or classes of goods for which recognition has been granted by the Central Government.

Meaning of Registered Association

Section 65(89b) defines 'registered association' as under -

"Registered Association has the meaning assigned to it in clause (jj) of section 2 of the Forward Contracts (Regulation) Act, 1952".

Section 2(jj) of the Forward Contracts (Regulation) Act, 1952 defines 'registered association' as under-

"registered association means an association to which for the time being a certificate of registration has been granted by the commission under section 14B".

Registered associations are required to be registered with the Forward Market Commission. These associations are commonly known as commodity exchanges and there are more than twenty such exchanges in India. Some of the leading commodity exchanges are:

·National Multi-Commodity Exchange of India Ltd., Ahmedabad (NMCE)

·National Commodity and Derivatives Exchange Ltd., Mumbai (NCDEX)

·Multi Commodity Exchange of India Ltd., Mumbai (MCX)

Taxable Service

Section 65(105)(zzy) defines 'taxable service' as under-

"Any service provided or to be provided to any person, by a member of a recognized association or a registered association, in relation to a forward contract".

Forward contract services are liable to be charged to service tax when provided by a member of any registered or recognized association to any person in relation to forward contracts. The members of these associations provide trading platform to persons who wish to deal in forward contracts of goods and commodities. Taxable service should be provided by members of such associations and any service provided by a member of an unrecognized association shall not become taxable. Also, service should be in relation to a forward contract, not a ready delivery contract.

A service to be taxable, should satisfy the following conditions-

(a)   service should be provided (includes service to be provided) to any person.

(b)   service should be provided (includes services to be provided) by any member of a registered or recognized association.

(c)   service should be in relation to a forward contract.

(d)   service should not be related to a ready delivery contract.

(e)   service should not be provided by a non-member of registered/recognized association or member of unregistered/non-recognized association.

CBEC has clarified vide Circular No. 80 dated 17-9-2004 that the levy of service tax is on the services provided by members of commodity exchange to any person in relation to forward contract.

Value of Taxable Service

In the event of service provider providing service without any consideration, the value of taxable service will be nil. Similarly, transactions done on 'on account' wherein no client is involved, there will be no service tax.

The value of taxable service will not be the value of a forward contract but only that portion of the contract which constitutes brokerage or service charges. Any statutory levy charged by the dealer will also not form part of value. Service tax shall be calculated only on the brokerage component which should be separately disclosed on the contract note/bill.

Person Liable

Every member of a recognized/registered association rendering forward contracts services shall be liable to pay service tax and shall be treated as an assessee for service tax purposes.