No GST on Investment for start-ups

Why we should earn money? Just to spend that hard-earned money in our daily needs or to invest that money to grow more wealth for ourselves. I guess we all definitely pick out the second one which is undoubtedly make you read this article further.

Saving money these days are very important but only saving and not investing that money means that you have only crossed the half road of growth. Money lying idle in your bank account is like an opportunity lost which further results in scraping away of such money due to inflation.

Now as you are a start-up company you will eventually face the no -fund situation which no doubt happens with everybody initially but you can avoid that if you take wise steps in the starting of your business.

Investing in stocks, shares, and mutual funds, gold or in any other security will be your helping hand in severe cases. At the first it is to clarify that the objective of this article is not to focus on which is the best vehicle to invest in but rather to clear up the GST implication on investment for start- up.

GST implication on investment for start-ups

The GST implication in respect of various investment vehicle are available wherein start-ups can invest money which are as discussed below-

1. GST on Stock/shares investment

Goods and Service tax is a tax on supply of goods and service or both. Thus, in order to be pay GST, an activity or transaction should include supply of goods or service or both. The definition of “Goods” is defined under section 2(52) of the CGST Act, 2017 and the definition of “Service” is defined under section 2(102) of the CGST Act 2017 where securities are neither regarded as goods nor as services. Therefore, supply of securities falls in the definition of “non-taxable supply” under section 2(78) of the CGST Act, 2017.

Now, our task is to see whether these shares and stocks are covered under the definition of securities. Section 2(101) of the CGST act, 2017 provides that “securities” shall have the same meaning as is assigned to it in clause (h) of the section 2 of the Securities Contracts (Regulation) Act, 1956. As per sub-clause (i) of clause (h) of the said act “securities” includes shares, scrips, bonds debentures, debentures- stock or any other marketable securities of a like nature in or of any incorporated company or other body corporate.

As the securities itself doesn’t covered in goods as well as service under the GST law there would be no applicability of GST on the purchase of stocks.  Similarly, there will be no GST when such stocks will be sold.

Furthermore, if you receive dividend on such stocks which is being a share of profit as well as a transaction purely in money towards the supply of any goods and service then such dividend would not be subject to GST.

2. GST on Mutual Funds investment

The units or any such instruments purchased under any mutual fund scheme which also covered under the definition of securities as per sub clause (id) of clause (h) of Securities Contracts (Regulation) Act, 1956 which means GST would not be applicable on purchase and sale of mutual funds.

Note* if there is some service charges or service fees or documentation fees or broking charges or such like fees are charged the same would be chargeable under Gst as it would be considered as supply of services and will be paid by the supplier of service.

Further, if you receive any dividend on such mutual funds then the same amount would not be come under the purview of GST Regime.

3. GST on Fixed Deposit / Recurring Deposit investment

Normally, start- ups who are risk averse generally like investing in FDRs /RDs with Banks /Post offices. Now, the question that pops before us are whether the GST is applicable on investment in FD/RDs and if yes then what would be the position of taxability of interest earned on such deposits?

The investment in FD/RD s are totally in money and money has been specifically excluded from the definition of goods as provided in section 2(52) of the CGST act 2017.

So, no GST would be applicable on applicable at the time of making any investment in FDs/ RDs.

4. GST on Public Provident Fund/ Employee Provident Fund investment

Any person employed in an entity are mandatorily covered under the Employee Provident Fund scheme wherein employer as well as employee contributes according to their agreement. Investment in such funds is also a transaction in money and therefore does not come under the purview of GST. Furthermore, interest on these funds is also exempted from the GST.

In regard to EPF certain charges are levied by the Employees Provident Fund Organization which is paid by the employers. Such charges has been exempted from the levy of GST vide entry notification No. 12/2017- Central Tax (Rate) dated 28-06-2017 and similar Notification issued under other Gst Act.

The GST implication on the various investment is as discussed in the preceding paras are summarized in the table below-

Table –

Conclusion

The introduction of GST model is a significant development that is set up to transform the Indian taxation system working. However, considerable work needs to be done and the implication of GST for start- ups needs to be understood properly.