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Service tax on stock brokers on the cards

ISLAMABAD (April 05 2005): The Central Board of Revenue (CBR) has agreed in principle to levy, in budget 2005-06, central excise duty (CED) as 'service tax' on commission earned by stock brokers of all the three bourses. In case the Ministry of Finance gives approval of the proposal, CBR would collect 'service tax' from 200 registered brokers of Karachi Stock Exchange (KSE), 150 of Lahore Stock Exchange (LSE) and 121 brokers of Islamabad Stock Exchange (ISE). Official sources told Business Recorder on Monday that the levy of 'service tax' is necessary for two major reasons:

First, there is no documentation of stockbrokers with the sales tax department. The tax on sales and purchase of shares at stock markets is not serving the purpose of documentation of the brokers/brokerage houses. By imposing central excise duty (CED) on commission of the stock brokers, the sales tax department would be in a position to document this sector with huge potential, which would subsequently help the income tax department to know about the actual earnings of the brokers.

The CBR is committed to bring more service providers within the tax net in the budget 2005-06). This would be the right step for broadening of the tax base by bringing sectors with sizeable potential into the tax net.

Secondly, the 'stock brokers' are not paying a single penny from their own pocket. They are providing a service but not paying tax on their services. The existing levy of capital value tax, on the income tax side, has nothing to do with the documentation of the brokers, officials said.

Thus, the CBR proposes levy of 'service tax' directly on the commission of these brokers from new financial year 2005-06).

Tax authorities are empowered to impose excise duty on the commission earned by stock brokers. For the purpose of using powers of the Central Excise Act, 1944 to levy 'service tax', the CBR is not legally bound to take concurrence of provinces or Securities and Exchange Commission of Pakistan (SECP).

Officials pointed out that Indian government has levied 10 percent services tax on the commission earned by stock brokers. Under Indian law, 'taxable service' means any service provided to an investor by a stock broker in connection with the sale or purchase of securities listed on a recognised stock exchange.

On the other hand, in Pakistan, the brokers earning huge profits need to be brought under the tax net keeping in view the annual capitalisation of the market.

Presently, CBR is collecting 15 percent central excise duty on services rendered by telecommunication companies, insurance agents and shipping agents under sales tax value-added tax mode (VAT), the officials said.

At the stock exchanges, investors are paying capital value tax on sale and purchase of shares. The registered stock exchanges are collecting advance tax on carryover trades (COT – Badla) mark-up transacted through its automated system in COT market. However, officials admitted that there is an immediate need of levying 'service tax' on the commission earned by the brokers of the exchanges like the levy applicable in neighbouring country.

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