In order to stay one step ahead, it is imperative for every business to take stock of its financial position to devise a suitable investment strategy from time to time. While some may settle with the traditional approach of buying and holding stable dividend paying stocks to generate a steady income stream, others may adventure in frequent trading, holding the stocks just long enough to capture dividend it pays.
With the advent of the GST regime, somewhere beyond striking a balance between the risks and returns, a business may have to consider the GST implications involved as well, while earning the sweet fruits of dividends earned on account of ownership of shares. This article is an attempt to analyse whether the investment income earned in the form of dividends arising on account of ownership of shares is to be taken into consideration for reversal of common input tax credit under Rule 42 and Rule 43 of the Central Goods and Services Tax Rules, 2017 (hereinafter “the CGST Rules”).
The term ‘dividend’ has not been defined under the GST law. However, Section 2(35) of the Companies Act, 2013 defines the term ‘dividend’ to include any interim dividend. It is an inclusive and not an exhaustive definition. In common parlance, ‘dividend’ means the profits of a company, not retained in the business but distributed among the shareholders in proportion to the amount paid-up on the shares held by them.
The Supreme Court in CIT v. Girdhardas & Co. (Private) Ltd. observed that the expression “dividend” has two meanings-
- As applied to a company which is a going concern, it ordinarily means the portion of the profits of the company which is allocated to the holders of shares in the company.
- In case of a winding up, it means a division of the realised assets among the creditors and contributories according to their respective rights.
In light of the above understanding, we may now refer to the relevant GST provisions for analysing whether such dividends need to be considered for reversal of common credit under GST. Section 17(2) of the CGST Act provides that where goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under CGST/IGST Act and partly for effecting exempt supplies (including non-taxable 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.
Further, Section 17(3) of the CGST Act provides that the value of exempt supply under Section 17(2) shall be 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.
It is pertinent to note that Section 2(101) of the CGST Act provides that “securities” shall have the same meaning as assigned to it in Section 2(h) of the Securities Contracts (Regulation) Act. The term ‘dividend’ in itself is not included in the said definition. However, it becomes relevant to examine if the earning of dividend on account of holding shares (qualifying as ‘security’ under the definition) is in any manner connected to the expression, “transaction in security”. Since this expression has not been defined under GST law, let us refer to the meaning of “transaction in securities” under foreign jurisprudence.
Section 709(2) of the Income and Corporation Taxes Act 1988 [UK] defines the term ‘transaction in securities” as follows:
transaction in securities includes transactions, of whatever description, relating to securities and in particular-
- the purchase, sale or exchange of securities;
- the issuing or securing the issue of, or applying or subscribing for, new securities;
- the altering, or securing the alteration of, the rights attached to securities...”
In this regard, there have been multiple discussions regarding the meaning and scope of term ‘transaction in securities’ by the House of Lords. For instance, in Her Majesty’s Commissioners of Inland Revenue v. Laird Group Plc. , it was held that the payment of a dividend in respect of shares was not "a transaction in securities" or "a transaction relating to securities" for the purposes of the Income and Corporation Taxes Act 1988.
In light of the above, we need to understand whether dividends can fall under the ambit of ‘transaction in securities’ under GST. Explanation to Chapter V ‘Input Tax Credit’ of CGST Rules provides that for the purpose of determining value of exempt supply under Section 17(3) of the CGST Act, the value of security shall be taken as 1% of sale value of such security. Here, the term ‘value of securities’ is used in the context of sale of securities. A plain reading of the said explanation suggests that the scope of the said term ‘transaction in securities’ is only limited to the transaction of sale of securities.
However, the question arises whether ‘transaction in securities’ should be restricted to sale of securities only or the same could extend to transactions prior to the sale of securities. Dividends are incomes earned prior to the sale of shares on account of ownership of shares held by a shareholder. Thus, a view may be taken that the payment of dividends does not amount to a ‘transaction in securities’ and hence, a registered person may not be required to reverse input tax credit on such dividend income under GST.
However, the tax authorities may take an argument that the term ‘transaction in securities’ is wide enough to cover any transaction related to such security and hence, dividends are nothing short from transaction in securities and the same merit credit reversals as much as the transaction of sale of such shares does.
Interestingly, even if a view is taken that receipt of dividends does not merit input tax credit reversals under GST, yet every business will have to make input tax reversals on sale of securities due to the presence of deeming fiction under Section 17(3) of the CGST Act. Such deeming fiction makes matters worse for a business that does not make any exempt supply per se as per Section 2(47) of the CGST Act and still will have to manage the uphill task of monthly reversals due to such ‘transaction in securities’.
Now that the concept of separate business verticals has been washed out, can taking separate (voluntary) registration be an escape from this vicious circle of reversal? Proper analysis needs to be done for taking such a recourse on a case to case basis.
The author is an Associate in GST Practice, Lakshmikumaran and Sridharan, New Delhi