Sebi-taxman fight over service tax dues reaches Supreme Court

The capital markets regulator has been involved in a prolonged battle with the CGST department of Mumbai. The case pertains to two tax notices sent by the CGST commissioner, demanding ₹130 crore from Sebi in service tax dues.

Sebi collects fees from various market intermediaries including stock exchanges, brokerages and clearing corporations. This is in the form of either registration fees or licence fees. The erstwhile service tax department, which has now been merged into the CGST department, sent the tax notices to Sebi in March 2016.

The tax department alleged that the fees collected by Sebi from market participants must be subject to a 14% service tax. Accordingly, it asked the regulator to cough up a service tax of ₹75.2 crore in the first notice and an additional ₹55 crore in the second notice. These notices were for the fees collected by Sebi during the period 2012-2016.

Sebi has argued that the money it receives is exempt from any service tax since it is a statutory body. An email sent to Sebi remained unanswered.

Lawyers said Sebi must not be asked to pay service tax for the fees it collects. “These are sovereign functions and statutory levies as per various regulations and there is no service being rendered by Sebi to the market institutions for the fees collected. In fact, Sebi is just discharging its obligations as a statutory body,” said Abhishek Rastogi, partner, Khaitan & Co. “In legal terminology, there is the absence of ‘quid pro quo’ and hence the absence of any service element.”

The CGST Commissioner, however, did not agree with Sebi’s argument and passed orders against the market regulator. In 2018, Sebi filed an appeal against the order at Customs, Excise and Service Tax Appellate Tribunal(CESAT), Mumbai. In June 2020, CESAT ruled in favour of the tax department. Sebi has appealed this order.

Back in 2016, then Sebi chairman UK Sinha moved the finance ministry against the tax notices. In the Union Budget for FY17, the government provided an explicit exemption for regulators including Sebi and the IRDAI from the burden of service tax. However, the amendments didn’t address the existing litigation.

“While the government proactively brought an amendment to remove doubts, it was introduced prospectively, which meant that the dues from earlier years were not exempt,” said a leading tax lawyer on condition of anonymity. “The apex court will now have to render an interpretation. Similar cases are pending in the mining sector as well.”

Sebi wanted the amendments to be introduced retrospectively. However, the government has not provided any further clarification. Under the Finance Act, 1994, any entity that is part of the so-called ‘negative list’ is exempt from service tax. Most government agencies fall under this negative list, which has been one of Sebi’s arguments.