Sale of Mutual Fund can be subject to ITC Reversal: Know More

In this Article we will discuss provisions related to reversal of Input Tax Credit (ITC) in GST Law case of Sale/ Redemption of Mutual Funds.

Section 17(2) and 17(3) is given below for your reference:

(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

(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.

Section 2(101) is given below for your reference:

(101) “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);

Definition of Securities as per clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)

(h) “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;

(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;

Explanation 2(b) of Chapter V

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) ….

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

Plain reading of these provisions make you understand that we need to reverse ITC in case of redemption of Mutual Funds. But, Here the question arises that whether the activity of redemption of securities would cover within the expression ‘transaction in securities’?

In this regard, we may note that the expression ‘transaction in securities’ has not been defined under the GST laws.

Treatment in Service Tax Regime:

Under Service Tax regime (read with Cenvat Credit Rules), the definition of goods included securities within its scope and the activity of ‘trading of goods’ was covered within the Negative list of services. The definition of exempted services was defined to include transactions that are covered within the Negative list of services. Therefore, trading in securities being trading in goods were treated as exempted services for reversal of Cenvat Credit.

Sharing some of the Case laws of Old GST Regime:

CESTAT, BANGALORE BENCH in matter of Ace Creative Learning (P.) Ltd. v. Commissioner of Central Tax held that in case investments are made in mutual fund and earned profit from it which was shown in Books of Account under head ‘other income’, he could not have been termed as ‘service provider’, hence, department had wrongly demanded reversal of credit on exempted services

5. After considering the submissions of both the parties and perusal of the material on record, I find that the appellant is providing Commercial Training and Coaching Services and they have also invested in the mutual funds and have earned profit during the year 2014-15, 2015-16 & 2016-17 which they have shown as under the head “other income”. The Department has wrongly considered the investment in mutual fund as trading in mutual funds and has issued a notice on the presumption that the appellant is providing exempted services which is trading in mutual funds and has not maintained separate records for common input services availed in providing the output services and exempted activity i.e. trading and hence are liable to pay 6%/7% of the amount of exempted services. Further I find that the ‘trading’ has not been defined under the Service Tax but in the context of securities, ‘trading’ means an activity where a person is engaged in selling the goods and occupy for the purpose of making profit but certainly trading is different from redemption of mutual fund units, in the present case appellant cannot transfer the mutual fund units to third party and give only by redemption to the mutual fund because the appellant is not permitted to trade mutual fund unit in the absence of a license from the SEBI. There is a restriction on the right to transfer unit and the appellant cannot transfer units to any other person. Further I find that the appellant cannot be termed as “service provider” because he only makes an investment in the mutual fund and earn profit from it which is shown in the Books of Accounts under the head “other income”. Hence the question of invoking Rule 6 does not arise and I am of the view that Department has wrongly invoked the provisions of Rule 6(3) demanding the reversal of credit on the exempted services. I also find that substantial demand is time-barred as during the audit, the Department entertained the view that the appellant is engaged in providing the exempted services and consequently issued the show-cause notice. The appellant has been filing the returns under the taxable service of ‘Commercial Training and Coaching and has provided all the records to the Department during the course of investigation and has not suppressed any material fact from the Department and in view of the various decisions relied upon by the appellant, extended period cannot be invoked where the Revenue’s case is based on Balance Sheet and income return and other records of the assessee. In view of my discussion above, I am of the considered view that the impugned order is not sustainable in law and the same is set aside by allowing the appeal of the appellant.

Conclusion:

• Redemption of Mutual Fund is Transaction in Money
• Reversal of ITC should be required in case of sale of securities and not redemption of an investment.

However, Department may take a wider interpretation to say that the activity of redemption of securities would include within the scope of transaction in securities and, therefore, it would require reversal of input tax credits.

All we need to wait for someone to challenge this under GST Law to get more clarity.

Qualifications:

The above is based on the provisions of applicable law prevailing at the present time and the facts of the matter as we understand them to be. Any variance of facts or of law may cause a corresponding change in our opinion. The opinion contained in this document is exclusively for use by you and your respective employees and representatives and may not be used or relied upon by any other person without our prior consent. This opinion is not to be transmitted to any person, nor is it to be relied upon by any other person or used in connection with any other purpose or quoted or referred to in any public document or document filed with any person, authority, organization or other entity without our express consent.