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GST for Traders



Do Traders Need to File GST

The Goods and Services Tax is a milestone in the history of Indian indirect tax laws. Any business registered under GST must charge GST on the sale of goods or services. It is applicable to manufacturers, traders (dealing in Goods & Services), and service providers. The most common GST related question: Do traders (Trading Securities) need to file GST? They are often confused about the applicability of GST (Goods and Services Tax) to ‘trading in securities.’ The answer is: GST is NOT applicable to the purchase/sale of Securities.

Securities have the same meaning as per Section 2 of Securities Contracts (Regulation) Act, 1956 and includes shares, scrips, stocks, bonds, debentures, debenture stock, other marketable securities, and derivatives. Let’s deep dive!

Read More: GST in India

GST for Traders on Securities

If one looks at the history of indirect taxes, activity of sale and purchase of securities has never been subjected to any service tax and value-added tax (VAT). Even the GST Act EXCLUDES Securities from the definition of Goods. Section 2(52) gives us the definition of goods as: ‘any movable property except money and securities.’ While Services mean: ‘ anything other than goods, money, and securities.’

This tells us that trading in shares and securities falls outside the ambit of the GST Act. And Securities Traders are not liable to register under GST.

GST might be called a destination-based ‘consumption’ tax whereas securities are ‘investments’. Imposing a tax on something which merely represents investment would go against the principle of GST. But there’s a click here. If you are a broker, you must be earning brokerage and commission income from Securities Trading. Now, this is a service and comes under the ambit of GST. Hence, inclusion in Aggregate Turnover is necessary to determine the applicability of GST Registration if it crosses the Turnover Threshold. The GST tax rate on Brokerage is 18%.

GST for Traders - Do they need GST Registration?
Do Traders Need to File GST? They are often confused about the applicability of GST (Goods and Services Tax) to ‘trading in securities.’
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GST for Traders - Do they need GST Registration?
Do Traders Need to File GST? They are often confused about the applicability of GST (Goods and Services Tax) to ‘trading in securities.’
Read More

What’s the Threshold Limit?

If you are a business owner, it is mandatory to register under GST if the Aggregate Turnover exceeds INR 40 Lakh (INR 20 Lakh for special category states) for the sale of goods & INR 20 Lakh (INR 10 Lakh for special category states) for the sale of services.

Is Trading Turnover a Part of Aggregate Turnover?

Aggregate Turnover includes the sum of the sale of goods and services. And since the definition of goods and services excludes securities, the ‘aggregate turnover’ should NOT include ‘trading turnover’ to determine the applicability of GST Registration.

Trading Turnover is the turnover calculated for each trading segment as per the reporting requirements of the Income Tax Act.

Calculate Aggregate Turnover under GST
To check applicability of GST Registration or to avail benefit of Composition Scheme, refer steps to calculate Aggregate Turnover under GST
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Calculate Aggregate Turnover under GST
To check applicability of GST Registration or to avail benefit of Composition Scheme, refer steps to calculate Aggregate Turnover under GST
Read More

Trading Expenses on Securities Trading

Expenses incurred on trading in securities include CGST, SGST, or IGST. This is nothing but the GST on expenses such as brokerage, transaction costs, turnover fees, etc. Traders usually incur such expenses during trading transactions. The trader can claim such expenses against the profit/loss from trading while filing the Income Tax Return on the income tax website.

How GST Works for Traders – Reporting in ITR-3

Turnover as per ITR must match with sales reported in GST Return to avoid any mismatch notice. If the trader does not have GST Registration, he/she need not report details of GSTIN in the Income Tax Return. If the trader has income from any business other than securities trading and has GST Registration, it is advisable to report the trading turnover from securities trading under Non-GST Supply in the GST Return.

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Impact of GST on Securities

There are some absurd effects of GST on Securities. For example, the sale of securities to Foreign Institutional Investors (FIIs) based out of India would most likely qualify as ‘export’ (subject to receipt in convertible foreign exchange) and be zero-rated. But the domestic sale of the same securities could be subject to GST. This might lead to a scenario that incentivizes all investments in India to be routed through foreign shores. Sounds like a death knell for domestic investments, doesn’t it?

Do Traders Need to File GST? Is it applicable to income from Securities? The answer in a nutshell – no.

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India US, Taxes, and Trump vs Biden

The US Elections! Trump vs Biden! NRIs and Immigrants! Millions of H1-B visas! But what about the tax implications? Prez Donald Trump, also known as the ‘tariff man’ brought about substantial changes in taxation. He cut the corporate tax rate from a tiered range of 15% to as high as 35% (depending on taxable income) to a flat 21%. He also retained the old structure of 7 individual income tax brackets. But in most cases, he lowered the rates. While the top rate fell from 39.6% to 37%, the lowest bracket remained at 10%.

For the Indians in USA, this was a great thing as they believe in savings. They are conservative and Trump’s Taxes help them save their hard-earned money.

It went on to affect a great number of Indians. An article by Quint, featuring Geeta Chopra of Pennsylvania dives into a lot of detail. She invested in a franchise business, hired 35 people, and she was able to do this because of the tax cuts and deregulation that the Trump administration offered. She is also a TV presenter and writer, and she believes that all the gains will be wiped out if Biden becomes US President.

This is because Mr. Joe Biden plans to increase the corporate tax rates from 21% to 28% and individual income tax rates from 37% to 39.6% on income above $400k. The annual $400k limit applies to 1.8 percent of Indian families, which are expected to earn 24.8% of the income in 2021. She compares this to a wartime plan. “They aim to generate taxes in the range of 19.5% of GDP, which is comparable to the financing needed for Vietnam, Korean, and WW2 wars. We are not in a war. Why even come to America then.”

But here’s the click! 75% of Indian Americans have a graduate degree. This is double compared to 31.5% of Americans. And a majority of them will definitely look at social problems. Moreover, there’s a great divide between the ideals of Republican Trump vs Biden Democrat. Biden might have a more consensual style of presidency. It might just be morally correct to go with the Republicans. Biden would strive to curb the USA-European Trade War. And not to forget the ‘Kamala-Harris-factor.’ She‘s a Republican and an Indian. But Trump has the ‘Howdy-Modi’ under his sleeve too. And there’s one thing for sure, no one can ever truly replace the ‘tariff man.’

In the 2020 Indian-American Attitude Survey, taxes rank as the 4th most important factor of the US elections while the Economy remains the-most-important factor. So, should a citizen worry about the economy or his/her personal savings? A question everybody needs to ask. But one thing cannot go unnoticed over here. Only 3% are worried about U.S.-India relations. This explains a lot. For the community, “kitchen-table issues” rank higher than foreign policy concerns.

Talking about Healthcare, which is the second most important. H1-B workers pay billions in taxes in the USA. Almost 70% of all H1-B visas issued by America are for Indians. Total taxes contributed by all the H1-B visa holders stand at $85B. The average salary of an H-1B visa holder in the US is $118,100. So, with a base rate of 24%, he or she pays $28,344 in taxes each year. A chunk of these taxes – 7.65% of the annual income, or $27.1 billion per year – goes towards benefits such as social security, medicare, local businesses, and American companies which don’t cover H-1B holders. It is safe to say that ‘tax’ is just another pillar under the same roof.

But this is not the end. Immigrants, students, and visa holders remit large portions of their salary to their home countries. There is of course no limit to how much money they can send to their relatives, provided they’ve paid their taxes in the USA. But there’s also a limit of $14k per person per year for the tax-free transaction. Any amount sent above the $14k per person per year is eligible for gift taxes in the USA.

This is quite thought-provoking. So if you earn an average of $118,100 which is equivalent to INR 88L. Firstly, there’s a base rate of 37% federal tax, which Biden wants to increase! Secondly, the additional state taxes, which might vary greatly depending on the state. Thirdly, immigrants send enough money back home for their parents. There’s a tax on that, too. And not to forget the wild living expenses of the USA. And only after all of this can one talk about savings. Considering all of this, a President who can stand up to better tax reforms may just seem to be a better candidate for the elections.

Whatever the results, the entire world will be watching.

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👨‍✈️ O’ ISIN! My ISIN!

You all must have heard about the infamous Section 112A and the excruciating amount of details traders need to provide during trade-wise reporting. So, while filing for capital gains with ITR 2 and ITR 3, you have to provide the following details of share sold during FY 2019-20:

1. ISIN (aka International Securities Identification Number)

2. Name of the share/unit

3. Number of shares

4. Sales-price per share/Unit

5. Cost of Acquisition

6. FMV as on 31/01/2018

7. Expenditure related to transfer

Out of all the above details, ISIN was most difficult to procure as brokerages and investment platforms wouldn’t provide their customers with the same. Yes, it was such a hassle that traders were pulling their hair out.

Now, there might be a chance that the Income Tax Department heard the cries. It came up with a major relief a few days ago – you no longer need to lookup for ISIN. Instead, the trader can use an ‘INNOTAVAILAB’ as ISIN. This can be used in place of the older/original ISIN! This will greatly reduce the stress in trade-wise reporting. Taxpayers now have to worry about one less detail in cases where the data is huge and time is less.

Have any questions ?
What are all the Income Tax Utility Updates?
Have any questions ?
What are all the Income Tax Utility Updates?
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Things to keep in mind: Zerodha Tax PNL Report

You can download the Tax P&L Report from Zerodha Console.

How to Download Tax Profit & Loss report from Zerodha?
Step-by-step guide to download Tax P&L from Zerodha Console
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How to Download Tax Profit & Loss report from Zerodha?
Step-by-step guide to download Tax P&L from Zerodha Console
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The report includes details of segment wise trading – scrip name, buy value, sell value, buy price, sell price, realized profit, and trading expenses.
This Tax P&L Report can be used to prepare P&L A/C to report it in the Income Tax Return.

However, the trader must take care of the following things where the treatment as per Income Tax may differ.

  • Expenses

    The Tax P&L Report covers transfer expenses that are directly related to trading transactions.

    In the case of Capital Gains from Equity Delivery and Equity MF/ETF, you can only deduct transfer expenses such as brokerage, turnover fees, transaction charges, GST, stamp duty, etc.

    In the case of Intraday and F&O, you can also claim other expenses – such as internet expense, legal fee, subscription expenses, depreciation, etc which are not covered in Tax P&L Report.
What Expenses Can a Trader claim when filing Income Tax Return?
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What Expenses Can a Trader claim when filing Income Tax Return?
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  • Buy Back Gains

    When a company buys back shares issued by it from an existing shareholder, it results in capital gains for the shareholder. Such buyback gains would be included in the Tax P&L Report.
    As per a recent amendment in Budget 2019, the gains from buy-back are exempt in the hands of the individual since the company is now liable to pay the buyback tax under Section 115QA. This amendment is applicable to all the buybacks after 5th July 2019. Therefore, buyback gains before 5th July 2019 are taxable for the trader and the ones after 5th July 2019 are exempt.

    If such buyback gains have been included under Capital Gains in Zerodha, you can omit the buyback gains and report them under Exempt Income in the ITR.
Section 115QA - Tax on Buyback of Shares
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Section 115QA - Tax on Buyback of Shares
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  • Calculation of Long Term Capital Gains under Section 112A

    LTCG on the sale of securities (on which STT is paid), bought on or before 31st Jan 2018 should be calculated using the Grandfathering Rule. As per this rule, the Cost of Acquisition is computed after considering the FMV as on 31st Jan 2018 as per Section 112A.
    Zerodha provides the FMV as on 31st Jan 2018 and the taxable Long Term Capital Gains in the ‘Tradewise Exit-Entry’ tab of the Tradewise Tax P&L Report. Thus, the LTCG should be calculated as per the grandfathering rule using the FMV of each trade in the Tradewise Tax P&L Report.
Section 112A – Tradewise details of LTCG (Nightmare for Traders)
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Section 112A – Tradewise details of LTCG (Nightmare for Traders)
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  • Transfer In/Out

    If you moved your portfolio from another broker to Zerodha or vice versa, your brokers will have partial data (either buy-side or sell-side depending on transfer in or out). Most brokers including Zerodha let traders enter such missing data. However, there are high chances of missing out Capital Gains arising out of such transfers.
  • Devolvement

    Devolvement means that the option contract will get converted into a futures contract of the same underlying. As per the Zerodha Support thread, the RMS team (at their discretion) can square-off of open positions upon Failure to produce the margin. Any gains/losses arising from such trades will be included in the Tax PnL report – marked as “DEVOLVED”
  • Reversals

    As per the Zerodha thread, Reversal trades are alleged to be non-genuine trades. All reversals will be included in Tax PnL report – marked as “REVERSALS”. In most cases, reversals are punched in on a cost basis & hence do not carry any tax consequences. However, sometimes the reversals for short deliveries are not entered on a cost basis, the gain or loss in such cases must be included under Capital Gains in the Income Tax Return.

All of the above conditions are considered when you file your Tax Return using Quicko. However, reporting may vary depending on your specific situation, hence it’s always advisable to consult a tax professional when in doubt.

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The Mega TCS Buyback

It’s been one heck of a rollercoaster for the stock markets ever since the outbreak of the pandemic. Indian giants, especially the ones under the Nifty50 and the SENSEX play a huge role in moving the markets. While some have lost tremendously, some have come out of it as winners. IT giants have surely emerged as the major champions. And just recently, the mega TCS buyback was announced to pass on this win to its shareholders.

Tata Consultancy Services Ltd. announced this repurchase on 7th October 2020. They sanctioned an INR 16k cr worth of buyback to reward its stakeholders. This includes a total of 5.33 crore shares or 1.42% of the total paid-up equity. The buyback valuation is INR 3k per share making the tech giant the first company after Reliance Industries to cross INR 10 lakh cr market capitalization. 

And note, this is not the first buyback announced by the giant. The IT giant had previously made buybacks worth around INR 16k cr each in 2017 and 2018 as part of its long-term capital allocation policy of returning excess cash to shareholders. And, of course, the buybacks were conducted at a premium to the company’s market value.

But is this what was expected of TCS? The pandemic has made winners of the IT giants. TCS alone has come at 4.5% revenue growth. These companies have tons of cash lying around. So, with approx INR 50k cr net cash in their hands, TCS decided to use a small chunk of it to reward the shareholders. But is a 16k cr. worth buyback (a sheer 1.42% of paid-up equity) going to have a positive impact on the stocks of TCS? Well, stocks are currently at 27 times two years forward. In the last three months alone, the stock price has skyrocketed by 20%. Nonetheless, the buyback is a positive development for the IT sector. It could be a precursor for other IT companies to follow suit – Wipro did make an announcement a few days after the TCS buyback! It has almost INR 30k cr of net cash.

Taxes and Buy back of shares

They say, nothing is certain except death and taxes. Much like TCS, huge companies having high distributable cash, generally reward its stakeholders in two ways:

  • Declare dividend; or
  • Purchase its own shares (i.e. buyback its shares)

Earlier, the amount distributed as buyback of shares was chargeable to capital gains in the hands of shareholders while the companies were not liable to pay any tax. And being treated as capital gains, the income tax was paid at lower rates on buyback of shares. So, to avoid taxes, companies started resorting to buybacks instead of declaring dividends. As an anti-tax avoidance measure, the government introduced Section 115QA in the Finance Act, 2013. So now the companies are liable to pay tax on the buyback of shares while the shareholders do not have to pay any tax on the same. This move made buybacks and dividends alike from the tax perspective of the companies.

But after the Budget 2020, dividends and buybacks are no longer at par from the tax perspective of a company.

Section 115QA - Tax on Buyback of Shares
In simple terms, buyback of shares is when a company repurchases the shares issued by it from the existing shareholders. Tax on buyback of shares in India is now regulated by Section 115QA of the Income Tax Act, 1961.
Read More
Section 115QA - Tax on Buyback of Shares
In simple terms, buyback of shares is when a company repurchases the shares issued by it from the existing shareholders. Tax on buyback of shares in India is now regulated by Section 115QA of the Income Tax Act, 1961.
Read More

So what changed? The government removed the 10% DDT aka Dividend Distribution Tax payable by the companies. The dividend is now taxable at the hands of shareholders and not the companies. As a result, promoters and high shareholders now have to pay as high as 40% tax (highest tax slab) on dividends. Also since the income is taxable in the hands of the shareholder, TDS at a rate of 10% (if the amount exceeds INR 5000) would be applicable. On the flip side, shareholders are exempt from paying any taxes in case of buybacks.

This said buybacks have emerged as the better choice of returning capital to shareholders in comparison to dividends. And looks like the Indian Government agrees too. Recently, Centre has asked at least eight state-run companies to consider share buybacks in the current financial year. The companies asked include miner Coal India , power utility NTPC , minerals producer NMDC and Engineers India Ltd. Besides, being tax-friendly for promoters to take the cash out, buybacks also boost companies’ financials, which is another positive. The trending ‘buyback’ route will lure cash rich firms to fundamentally improve investor confidence.

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