To err is human. As there is no garden without a weed so is no government without its folly. Underwriting services have been in existence in the ambit of service tax since 1998. CBEC has taken more than 12 years to acknowledge the problem and issues faced by the underwriters.
Recently on August 10, 2010, the ministry came out with a clarification on the issue of underwriters engaged in dealing with government securities. The moot question remains unanswered, as to what will be the state of all pending litigations and what relief government has provided to those underwriters, who have already suffered the trauma of the investigation agencies in these 12 long years and in the process, paid up huge taxes along with interest and penalty.
The CBEC vide their Circular 126/08/2010-ST dated 10.8.2010 refers to representation received seeking clarification whether service tax is leviable on the underwriting commission received by the primary dealers for the auction of government securities. It says that the matter has been examined, but fails to mention the vital issue regarding pending and past matters.
Underwriting service is taxable by virtue of section 65 (105) (z) of the Finance Act, 1994. In the definition of taxable service, two technical terms are mentioned, namely 'underwriting' and 'underwriter'.
The term 'underwriting' has the meaning assigned to it, in clause (g) of rule 2 of the Securities and Exchange Board of India (Underwriters) Rules, 1993, which reads as follows: "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 term "underwriter" has also been borrowed from the Securities and Exchange Board of India (Underwriters) Rules, 1993, which reads as follows: "underwriter means a person who engages in the business of underwriting of an issue of securities of a body corporate." It is thus clear that under the above definitions 'underwriter' or 'underwriting' is about dealing in securities of a body corporate.
The Ministry has intervened after a decade and has addressed the related issue requiring resolution as to whether dealing in government securities amounts to dealing in securities of a body corporate, particularly since government securities are issued by the Reserve Bank of India, which is a 'body corporate' in terms of section 3 (2) of the RBI Act, 1934. The fact is that government securities are sovereign securities having zero default risk. Reserve Bank of India only manages the issue and also auction of government securities on behalf of the government of India.
In effect, primary dealers registered with the RBI deal in government securities, issued by the RBI on behalf of the government of India, as a part of the central government's market borrowing programme. This is as opposed to registration with the Securities Exchange Board of India (SEBI). The general practice is that the RBI invites bids from the primary dealers, who in their bids indicate the amount to be underwritten and the underwriting fee expected by them.
RBI examines these bids and decides the amount to be underwritten and underwriting fee to be paid to a primary dealer. Underwriting Fee is also known as underwriting commission in common parlance. Now as per the board circular, the conclusion drawn is that government securities are not securities of a body corporate. Surprisingly, this logic was missing for the past twelve years.
As per 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 responsibilities between him and such body corporate.
As per the SEBI (Underwriters) Regulations, 1993, he 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 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.
As the Service tax law stands today, service tax liability doesn't arise on underwriting fee or underwriting commission received by the primary dealers during the course of the dealing in government securities.
