Indian Service Tax
Underwriting Service
Effective Date
16/10/1998.
Authority
Notification No. 53/98-ST, dt. 7/10/1998 (for full text of Notification see under'Architect').
Rate of Service Tax
8% from 14/5/2003 (5% upto 13/5/2003). 10% from 10/9/2004 - Cess 2% of 10% = 0.2. Total ST = 10.2%.
Definitions
"underwriter"has the meaning assigned to it in clause (f) of rule 2 of the Securities and Exchange Board of India (Underwriters) Rules, 1993, [Section 65 (116)]
"underwriting"has the meaning assigned to it in clause (g) of rule 2 of the. Securities and Exchange Board of India (Underwriters) Rules, 1993, [Section 65 (117)]
Taxable service
Underwriter providing service to a client in relation to underwriting in any manner.
Value of taxable service
The gross amount charged from the client by such underwriter for services rendered in relation to underwriting in any manner.
Person liable to Pay
Underwriter.
Head of Account
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Questions & Answers
Q. Who is Underwriter and what is underwriting?
Ans. The words "Underwriter" and "Underwriting" are defined in clauses (f) and (g) of Rule 2 of the Securities and Exchange Board of India (Underwriters) Rules, 1993.
According to the Securities and Exchange Board ofIndia (Underwriters) Rules, 1993, 'underwriter' means a person who engages in the business of underwriting of an issue of securities of a body corporate and 'underwriting' means an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them.
Q. What is the taxable service in case of service provided by Underwriter?
Ans. Taxable service means any service provided to a client, by an underwriter in relation to underwriting in any manner.
Underwriting services can be provided by financial institutions, banks, sharebrokers who are member of stock exchange and investment/ companies/trusts with adequate financial capacity, appropriate standing and experience. However, as per Rule 3 of the Securities and Exchange Board of Indian (Underwriter) Rules, 1993 no person can act as underwriter unless he holds a certificate granted by the SEBI under the Securities and Exchange Board of India (Underwriters) Regulations, 1993, and underwriter is required to enter into a valid agreement with the body corporate on whose behalf he is acting as an underwriter and the said agreement amongst other things may define the allocation of duties and responsibilities between him and such body corporate.
Q. What is the value of the taxable service .in case of service provided by Underwriter?
Ans. Value of taxable services in relation to the services provided by an underwriter to a client, is the gross amount charged by such underwriter from the cleint for services rendered in relation to underwriting in any manner".
As per Regulation 14 of the SEBI (Underwriters) Regulation, 1993 the agreement between the underwriter and the body corporate shall also provide fro the amount of commission or brokerage payable to the underwriter. Service tax is required to be paid by the underwriter at the rate of 5% on such commission or brokeage paid by him for the services of underwriting rendered of underwriter whether an financial institution ot otherwise and also on the amounts devolving on the public and those devolving on the underwriters. Howerver, the maximum underwriting commission applicable is notified by the Banking Department of the Ministry of Finance, though lower rates of underwriting commission can also be negotiated between the underwriter and the client.
Q. There are many companies who are lead Managers to issue of shares to the general public. In many cases, these lead managers also undertake the activity of underwriting of the issues. Would such companies also be covered in the category of underwriters?
Ans. An underwriter means a person who is engaged in the business of under writing of issue of securities of a body corporate. In case a lead manager, also undertake the activity of underwriting of the issues then such lead managers would be covered under the category of under writers, for levy of Service Tax.
Main text of Departmental Circular/TN
[TN No. 116/98-ST, Dated 15/10/1998 of Hyderabad Commissionerate]
As per Section 65 (53)* and Section 65 (54)** of the Finance Act,1994,"underwriter" has the meaning assigned to it in clause (f) of Rule 2 of the Securities and Exchange Board of India (Underwriters) Rules, 1993 and "underwriting" has the meaning assigned to it in clause (g) of Rule 2 of the Securities and Exchange Board of India (Underwriters) Rules, 1993. According to the Securities and Exchange Board of India (Underwriters) Rules, 1993,"underwriter' means a person who engages in the business of underwriting of an issue of securities of a body corporate and "underwriting" means an agreement with' or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them. The "taxable service" means the service provided to a client by an underwriter in relation to underwriting.
Underwriting services can be provided by financial institutions, banks, share brokers who are members of stock exchanges and investment/companies/ trusts with adequate financial capacity, appropriate standing and experience. However, as per Rule 3 of the Securitie's and Exchange Board of India (Underwriters) Rules, 1993 no person can act as underwriter unless he holds a certificate granted by the SEBI under the Securities and Exchange Board of India (Underwriters) Regulations, 1993. As per Rule 4(b) of the Securities and Exchange Board of India (Underwriters) Rules, 1993, an underwriter is required to enter into a valid agreement with the body corporate on whose behalf he is acting as an underwriter and the said agreement amongst other things may define the allocation of duties and responsibitities between him and such body corporate. As per Regulation 14 of the SEBI (Underwriters) Regulations, 1993 shall also provide for, inter alia, the amount of commission or brokerage payable to the underwriter. Service tax is required to be paid by the underwriter at the rate of 5% on such commission or brokerage paid to him for the services of underwriting rendered by him. The underwriting commission varies, depending upon the category of underwriter, whether a financial institution or otherwise and also on the amounts devolving on the public and those devolving on the underwriters. However the maximum underwriting commission applicable is notified by the Banking Department of the Ministry of Finance, though, lower rates of underwriting commission can also be negotiated between the underwriter and the client. The commission varies from 0.5% to 2.5%.
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