GST Exempt on Margin Trading Facility Interest: Karnataka AAR

In re ETS Securities Pvt. Ltd. (GST AAR Karnataka)

Summary: The Karnataka Authority for Advance Ruling, in the case of ETS Securities Pvt. Ltd., held that interest charged to clients for availing a Margin Trading Facility (MTF) is exempt from Goods and Services Tax under Entry No. 27(a) of Notification No. 12/2017-Central Tax (Rate), dated 28 June 2017, as amended. The ruling was pronounced on 15 October 2026 under Order No. KAR.ADRG/50/2026.

The applicant, a SEBI-registered stockbroker providing trading and investment-related services, proposed to allow clients to purchase securities by paying only part of the purchase value, while the broker financed the balance. Under the arrangement, clients could pledge securities as collateral, were required to maintain prescribed margins and would pay daily interest on the broker-funded amount from transaction day plus one until repayment or closure of the position. The applicant sought clarification whether such interest attracted GST.

The applicant relied on the exemption for services involving extension of deposits, loans or advances where the consideration is interest or discount. It referred to Section 2(47) of the CGST Act, Entry 27 of Notification No. 12/2017-Central Tax (Rate), CBIC’s sector-specific FAQs dated 27 December 2018, particularly Question 80 on margin trading facilities, and the Uttar Pradesh AAR ruling in SFPL Securities Private Limited. Its authorised representative reiterated these submissions at the hearing on 20 May 2026.

The Authority examined Sections 2(52) and 2(102) of the CGST Act. Although money and securities are excluded from the definition of goods and ordinarily from services, activities relating to the use of money for separate consideration fall within the definition of services. Since the broker financed purchases beyond the client’s available margin and received interest for that financing, the activity constituted a supply of services.

On exemption, the Authority observed that the arrangement had the essential characteristics of a loan or advance: the broker provided funds for a specified period, the client had to repay them, and interest represented consideration for the use of those funds. It also relied on the CBIC clarification that interest or delayed payment charges on margin trading facilities fall within the exemption for loans and advances. Crucially, the MTF interest was independent of brokerage charged for executing trades. The Authority accordingly ruled that interest charged by ETS Securities Pvt. Ltd. from clients under the proposed MTF arrangement is exempt from GST under Entry 27(a) of Notification No. 12/2017-Central Tax (Rate), as amended. The ruling concerns the interest component of financing, not a general exemption for brokerage or other separately charged services.

FULL TEXT OF THE ORDER OF KARNATAKA AUTHORITY FOR ADVANCE RULING

M/s. ETS Securities Pvt. Ltd. (Herein after referred to as Applicant), # 3rd Floor, No 14/1 Old 35/A Premises No 302, Anand Chambers, 14th Cross Elephant Rock Road, Jayanagar III Block Bangalore South, Bengaluru, Bengaluru Urban, Karnataka, 560011., is registered Under GSTIN 29AAACZ4853D1Z6, have filed an application for Advance Ruling under Section 97 of CGST Act, 2017 read with Rule 104 of CGST Rules, 2017 and Section 97 of KGST Act, 2017 read with Rule 104 of KGST Rules, 2017, in form GST ARA-01 discharging the fee of Rs.5,000/- each under the CGST Act, KGST Act 2017.

2. The Applicant is a brokerage company registered with SEBI and is engaged in providing trading and investment-related services, for which brokerage commission is charged from its clients. The Applicant now proposes to offer a service known as “Margin Trading Facility” (hereinafter referred to as “MTF”).

3. In view of the above, the applicant has sought advance ruling in respect of the following questions:

a) Whether the interest charged to clients who avail the MTF facility is liable for Goods and Services Tax.

4. Admissibility of the Application: The Applicant, under Column 13 of Form ARA-01, has indicated the category of issue as follows:

i. Applicability of a notification issued under the provision of this Act.

ii. Determination of the liability to pay tax on any goods or services or both.

The question raised by the Applicant squarely falls within the ambit of Section 97(2)(b) and 97(2)(e) of the Central Goods and Services Tax Act, 2017, relating to applicability of notifications and determination of liability to pay tax. Accordingly, the present application is held to be admissible under the aforesaid provisions.

5.1 Brief Facts of the Case: – The Applicant submits that Margin Trading Facility (hereinafter referred to as “MTF”) is a Facility approved by the Stock Exchanges, which can be offered by registered stock brokers to their clients. Under this facility, a client is allowed to purchase shares by paying only a part of the total value, while the remaining amount is funded by the broker.

5.2 The Applicant explains that, in the normal course, a client transfers funds from the registered bank account to the broker for purchase of shares. Based on the amount available with the broker, the client is permitted to purchase shares up to such limit. The amount provided by the client is referred to as “margin”. Such margin may also be provided in the form of securities pledged by the client.

5.3 However, under the MTF arrangement, the client is permitted to purchase shares of a value higher than the margin available in the account, and the differential amount is funded by the broker. The Applicant has further explained the process involved in MTF as under:

i. A client desirous of availing the MTF facility is required to request the broker for activation of the facility and provide necessary authorisation for pledging of shares through CDSL.

ii. Once the facility is activated, the client may place orders for purchase of shares, and the broker provides additional funds in the nature of a loan against the shares or other securities kept as collateral.

iii. If the value of the shares falls below the prescribed margin requirement, the broker may ask the client to provide additional margin or collateral. In case the client fails to fulfil the margin requirement within T+3 days from the date of shortfall, the broker has the right to liquidate or square off the pledged shares.

iv. Further, as per the proposed policy of the Applicant, interest will be charged from the clients for availing the MTF at a specified percentage per day on the amount funded by the broker. Such interest will be charged from Transaction+1 day (T+1) and will continue till the outstanding amount or position is fully cleared by the client.

6.1 Applicant’s Interpretation of Law: – The Applicant has drawn attention to the provisions of Section 2(47) of the CGST Act, 2017, which defines “exempt supply” as under:

“Exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under Section 11 of the CGST Act or under Section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.

6.2 The Applicant has further relied upon Entry No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended, which exempts:-

6.3 Further, the Applicant has placed reliance on the Industry Specific Frequently Asked Questions (FAQs) issued by the CBIC on 27.12.2018 in relation to the Banking, Insurance and Stockbrokers’ sector. In response to Question No. 80:-

6.4 The Applicant further submits that the interest charged on MTF is in the nature of consideration for extending loans or advances and therefore qualifies for exemption under the impugned notification.

6.5 The applicant places reliance on the decision of the AAR, Uttar Pradesh in the case of SFPL Securities Private Limited, wherein it was held that interest income arising from delayed payment charges is exempt from GST. The said ruling also took note of the CBIC FAQ dated 27.12.2018 relating to the Banking, Insurance and Stockbrokers’ sector.

6.6 Accordingly, the Applicant contends that the interest charged from clients towards MTF is exempt from Goods and Services Tax under Entry No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended.

7. PERSONAL HEARING PROCEEDINGS HELD ON 20.05.2026:

CA Vipul Jain, Authorised representative of the applicant, appeared for personal hearing before this Authorities held on 20.05.2026 and reiterated the facts and submissions as set out in the application. No additional facts, documents, or further arguments were advanced during the course of the hearing.

FINDINGS & DISCUSSION
8. At the outset, we would like to make it clear that the provisions of the Central Goods and Services Tax Act, 2017 and the Karnataka Goods and Services Tax Act, 2017 are pari materia and contain identical provisions on all material aspects, differing only in respect of certain specific provisions. Accordingly, unless a particular reference is made to such dissimilar provisions, any reference to the CGST Act, 2017 shall also be construed as a reference to the corresponding provisions of the KGST Act, 2017.
9. We have considered the submissions made by the applicant in the application for advance ruling. We have also examined the issues on which the advance ruling has been sought, the relevant facts of the case, and the arguments advanced by the applicant, including the submissions made by the learned authorised representative during the course of the personal hearing.
10.1 It is first necessary to determine whether the transaction in question falls within the scope of “goods” or “services” under the GST law. In this regard, Section 2(52) of the CGST Act, 2017 defines “goods” as follows:-

“goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

From the above definition, it is evident that both money and securities have been specifically excluded from the scope of goods.

10.2 Further, Section 2(102) of the CGST Act, 2017 defines “services” as follows:-

“services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged.

It is therefore evident that money and securities are ordinarily excluded from the scope of services. However, the definition specifically includes activities relating to the use of money where a separate consideration is charged. In the present case, under the MTF, the Applicant provides funds to its clients for purchase of securities beyond the margin available with them and charges interest on the amount so funded. Thus, the consideration received by the Applicant is in respect of the use of money by the client for a specified period. Accordingly, the activity is covered within the ambit of “services” as defined under Section 2(102) of the CGST Act, 2017.

10.3 Having held that the activity constitutes a supply of service, the next issue that requires examination is whether the interest charged by the Applicant on such funding qualifies for exemption under Entry No. 27(a) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended.

11. In this regard, Entry No. 27(a) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended, exempts, as mentioned in para 6.2 supra:

“Services by way of-

(a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services).”

(b) ………..

The above entry exempts services by way of extending deposits, loans or advances, to the extent the consideration is represented by way of interest or discount.

12.1 From the facts furnished by the Applicant, it is observed that under the MTF arrangement, the Applicant funds a portion of the purchase consideration of securities on behalf of its clients. The client is required to repay the funded amount and is liable to pay interest on such amount for the period during which the funding remains outstanding.

12.2 The essential characteristics of the transaction indicate that the Applicant is extending finance to its clients. The amount recovered by way of interest is consideration for making funds available to the client for a specified period. Therefore, the transaction possesses all the attributes of a loan or advance, where money is provided for use against consideration in the form of interest.

13. Further, it is pertinent to note that the Central Board of Indirect Taxes and Customs (CBIC), in its Industry Specific Frequently Asked Questions (FAQs) relating to the Banking, Insurance and Stockbrokers’ sector issued on 27.12.2018, while answering Question No. 80, clarified that interest or delayed payment charges collected towards settlement obligations or Margin Trading Facility are not leviable to GST, since such transactions are in the nature of extending loans or advances and are covered under Entry No. 27 of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.

14. In the present case, the interest proposed to be charged by the Applicant under the MTF is independent of the brokerage charged for execution of trades and represents consideration for providing finance to the client. Therefore, such interest is squarely covered under Entry No. 27(a) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended.

15. Accordingly, it is held that the interest charged by the Applicant from clients for availing the MTF is consideration for extending loans or advances and is exempt from GST under Entry No. 27(a) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended.

16. In view of the foregoing, we pass the following.

RULING

Question: – Whether the interest charged to clients who avail the MTF facility is liable for Goods and Services Tax.

Answer: – The interest charged by the Applicant from clients for availing the Margin Trading Facility (MTF) is exempt from Goods and Services Tax under Entry No. 27(a) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, as amended, being consideration represented by way of interest for extending loans or advances.