ITC reversal on sale of Mutual fund units, Goods and Services Tax - GST

[Siddharth Jain]

Whether ITC reversal is applicable on sale of Mutual fund units under GST?

If yes, then under which GSTIN is the reversal to be made if a taxpayer has a PAN India presence?

Additionally, whether such reversal is required to be made even from a SEZ GSTIN?

Posts / Replies

[Amit Agrawal]

Whether ITC reversal is applicable on sale of Mutual fund units under GST?

Answer: Yes, in view of Section 17 (3) read with Section 2 (101) of the CGST Act, 2017 read with Explanation 2(b) of Chapter V of the CGST Rules, 2017

If yes, then under which GSTIN is the reversal to be made if a taxpayer has a PAN India presence?

Answer: Wherever there is common ITC involved (i.e. goods / services - on which ITC is availed and which is used for transaction in securities) inviting Rule 42 & 43

Additionally, whether such reversal is required to be made even from a SEZ GSTIN?

Answer: Yes, only if there is common ITC involved (i.e. goods / services - on which ITC is availed and which is used for transaction in securities) inviting Rule 42 & 43.

Lastly, lot of industries - specially bigger one having multiple GST registrations all over India - are grappling with these questions as raised by you. One needs to properly structure entire business operations to minimise the damage or controversies arising out of those questions.

These issues can be specially troubling for tax-payers trying to get benefit out of second proviso to Rule 28 of the CGST Rules, 2017 for service-supplies between distinct persons as specified in sub-section (4) and (5) of section 25 (For example: HO / corporate related services (generally known in Market as 'Cross-charge))

So, it is suggested to take comprehensive review of existing tax-compliances of any organisation as a whole and take suitable structuring thereto (wherever needed) of business operations to minimise the damage or controversies arising out of those questions. One can always seek help & assistance from Expert if felt needed in this.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[SHARAD ANADA]

The RTP is in the business of supply of taxable Goods only and don't have any other exempt supply in that case In my personal view ITC Reversal is not required for sale of mutual fund because section 17(3) says that first there should be exempt supply. If there is any exempt supply, include in vaule in that exempt supply, 1% of sale value securities sold (refer explanation 2(b) of Rule 45)

If the RTP is not having exempt any supply then value of exempt supply is nil and no requirement of inclusion of value of mutual fund for arriving at total value of exempt supply.

Refer section 17(3)

(3) 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 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.

Also refer explanation 2(b) to Rule 45

Explanation.- For the purposes of this Chapter,-

(1) ...

(2) for determining the value of an exempt supply as referred to in sub-section (3) of section 17-

(a) the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; and

(b) the value of security shall be taken as one per cent. of the sale value of such security.

[Alkesh Jani]

Dear Experts,

I am raising this query for my knowledge purpose.

The Sale of Mutual Fund is sale of goods or Service?

Thanks in Advance.

[KASTURI SETHI]

Sh.Alkesh Jani Ji,

In brief, it is goods.

[SHARAD ANADA]

For GST purposes Mutual Fund i.e. securities is neither goods nor services. Please refer definition of Goods as per Sec. 2(52) and definition of services as per sec 2(102)

(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

(102) “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;

[Alkesh Jani]

Dear Experts,

In addition to the reply given by Shri Sharad ji,

Further, as per Section 2(101) of CGST Act, 2017, “securities” shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 [42 of 1956];

Section 2(h) of the Securities Contracts (Regulation) Act, 1956 is as below:-

securities include— (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;]

[(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]

[(id) units or any other such instrument issued to the investors under any mutual fund scheme;] 12(ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities.

Thanks

[KASTURI SETHI]

Sh.Alkesh Jani Ji and Sh.Sharad Anada Ji,

I agree with both of you.

Mutual funds are securities and securities are neither goods nor services but we are to examine the taxability from all aspects. Facilitation or arranging transaction in securities is taxable after amendment to the definition of 'service' w.e.f. 1.2.19. (amendment is retrospective effective from 1.7.17).

Pl. go through Circular no. 119/38/2019-GST dated 11.10.19

[SHARAD ANADA]

Kasturi Sir,

I believe this explanation is added to cover stock brocker under gst because definition of agent covers only agent in goods and services and securities are neither goods nor services hence technically share brocker is out side GST. Please refer section 2(5)

“agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another;

[KASTURI SETHI]

Sh.Sharad Anada Ji,

I agree with you in toto. But this is another way to tax mutual refunds (covered under the definition of 'securities' under GST Act borrowed from Section 2(h) of the Securities Contracts (Regulation) Act, 1956).

Shares certificates are goods. Shares are included in the definition of securities. On this analogy, can we not treat mutual funds certificates as goods ?

Your opinion pl.

[KASTURI SETHI]

Taxability of supply of securities under Securities Lending Scheme, 1997 — Clarification

Circular No. 119/38/2019-GST, dated 11-10-2019

[Shilpi Jain]

An important aspect to note here is that it is NOT SALE of mutual funds.

Rather it is REDEMPTION of mutual funds.

Also have a look at the article at this link on this subject titled as Mutual Fund Investment Is Subject To Market Risk – But Is It Subject To Rule 42

 

[Shilpi Jain]

The CESTAT in the case of Ace Creative Learning Pvt. Ltd. -  [2021 (4) TMI 687 - CESTAT BANGALORE]] had set-aside the demand for reversal of CENVAT Credit towards activities of redemption/sale of mutual fund.

Also refer to the tribunal decision in the case of ----> Space Matrix Design Consultants Pvt Ltd. - 2019 (4) TMI 1599 - CESTAT BANGALORE

[Amit Agrawal]

I agree with Shri Sharad Anada Ji that for GST purposes, Unit of Mutual Fund i.e. securities is neither goods nor services.

And there cannot be any dispute about this in view of clear definitions pointed in earlier posts. Hence, shares / units of mutual fund can not be called 'goods' under GST.

"facilitating or arranging transactions in securities" (by share brokers, mutual fund agents etc.) is different from 'buying / selling the securities per se or investment in mutual fund units' per se. And one should not mix the two and treat them as equal under GST.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

Activities of 'buying / selling the securities or investment in mutual fund units' per se (i.e. in-themselves) are "transactions in securities".

And it is worth noting that Section 17 (3) indeed uses the term 'transactions in securities' and not 'trading in securities'.

In my view, the term 'transactions in securities' covers not only the buying & selling (i.e. trading) in shares but also the investment & redemption of mutual funds.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Padmanathan Kollengode]

I agree with views of Sri Amit Ji and other experts that Mutual Funds are neither supply of goods nor supply of service. Also redemption/ sale of Mutual fund cannot be said to be facilitating or arranging transactions in securities simply because sale/ redemption itself is the transaction which is being facilitated/ arranged.

So the question here is whether it is covered within the ambit of Section 2(47) itself to call for reversal? In my view, when something is neither goods nor service, it falls outside ambit of supply and hence wont be covered under 2(47) for purpose of R.42 & 43.

[KASTURI SETHI]

But securities do not find place in Schedule-III. In the absence of the word 'securities' in Schedule-III, it may be termed as non-taxable supply and exempt supply includes non-taxable supply. In order to be out of GST net, goods and services must be included in Schedule-III. Goods and services mentioned in Schedule-III are equal to erstwhile negative list in Service Tax law.

[Padmanathan Kollengode]

Dear Kasturi Sir,

Pls consider this aspect:-

Schedule III considers activity or transaction as neither supply of goods nor supply of service.

If something is neither "goods" nor "service" due to the reason that it does not fall within the definition of goods and service, will it be supply under section 7?

(1) For the purposes of this Act, the expression “supply” includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

Non-taxable supply to my understanding means supply of goods or services which are not taxable due to Section 9 i.e. five kinds of petroleum products, alcoholic liquor for human consumption. [These are goods, and supply under section 7, but non-taxable supply as levy is not there under section 9]. Only this kind of non-taxable supply is included in definition of "exempt supply".

Kindly consider.

[Padmanathan Kollengode]

My apologies. I stand corrected to the extent that reversal is not required:-

I didn't take into account, in my earlier reply, provisions of Section 17(3) - 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 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.

The views of Amit Ji is correct in toto.

[KASTURI SETHI]

Sh. Padmanathan Kollengode Ji,

W.r.t. your views at serial no.17 above, I opine as under :-

The word, 'supply' suffixed with the term, 'non-taxable supply' and 'non-GST supply' . convey different message/meaning. The word is one (supply) but conveys different messages depending upon the usage. The former is related to CGST Act but the latter is not related to CGST Act. We cannot drag the word 'supply ' used in 'non-GST supply' into CGST Act/SGST Act.

In order to clarify further, I would like to say that there is a 'divorce' between 'non-taxable supply' and 'non-GST supply'. Both terms cannot be intermingled. The word, 'supply' used in 'non-taxable supply' cannot replace the 'supply' used in non-GST supply and vice versa.