The financial system stands on money and securities. Money is the medium that allows the exchange of goods and services. Securities are fungible and tradable financial instruments used to raise capital in public and private markets. They represent ownership in a company.
For better investment strategies it is important to understand the impact of GST on financial transactions and its interaction with money and securities.
Here we will try to gain deeper understanding of policies related to the same and their implications.
Let us try to understand the policies related to such transactions and their corresponding implications.
Basics of Money and Securities
The basic medium of exchange in any economy is money. Money is used to buy and sell commodities. It comes in physical forms like coin and bills and digital forms like crypto currency or bank savings.
The term security represents a tradable financial instrument. It has a certain monetary value. Securities can signify ownership in a company through stocks, a creditor relationship with a government or a company through ownership of bonds. The value is identified from underlying assets and contractual obligations.
The basic difference between money and securities are as below:
- Primary Function: Money acts as a medium of exchange and allows one to buy and sell things. On the other hand, securities represent ownership or debt.
- Liquidity: Money can be easily exchanged for other assets. Securities, on the other hand, have different extents of liquidity.
- Risk: Money has a relatively low rate of risk. The value of securities tends to fluctuate owing to various factors and hence they are considered to be risky.
- Return: Securities act as investments and give returns through interest payments. Money, on the other hand, does not provide any returns.
GST Fundamentals
The introduction of the Goods and Services Tax has reformed the way people do business in India. It has impacted jobs, businesses and the overall economic environment. The tax system aims at converting the entire nation into a single market. Under GST, Tax is imposed at each point of sale. Both state and central taxes are applied to sales within the same state. An Integrated GST applies to all interstate sales. GST is applicable in the following scenarios:
- Mandatory registration is required for individuals providing goods or services valued at more than Rs 20 lakh in a financial year.
- When the turnover surpasses Rs 20 lakh or Rs 10 lakh for special category states.
- Those engaged in inter-state taxable supply, every e-commerce operator, and individuals offering goods and services through e-commerce platforms.
- Aggregators providing services under their brand.
- Non-resident taxable persons, etc.
Forms of GST
The new layout of GST is supposed to simplify the tax structure by replacing indirect taxes like VAT, customs duty, Excise, CST, Service Tax, and Entertainment Tax with a unified tax. It is implemented in two forms:
- Intra-state: It refers to transactions within a state. The tax is bifurcated into CGST and SGST.
- Inter-state: It involves transactions between different states. IGST will be imposed for these transactions. Additionally, supplies to Special Economic Zones (SEZ) are zero-rated. This dual-level taxation system aims to create a more efficient and uniform tax structure across the country.
GST on Money Transactions
GST on money transactions in physical form is exempted whether in domestic or foreign currency. The logic behind this is very simple. Money is a medium of exchange and promotes buying and selling of commodities. Taxing each financial transaction would create a negative impact on the economy. It will impose a substantial burden on economic activities and introduce unwanted complexity into daily transactions. The exemption aims to maintain the simplicity and efficiency of financial exchanges.
However, In the case of money as well, certain exemptions are present. Certain activities related to money are subject to GST under the services category. These include:
- Foreign exchange conversion: Charges levied by banks or authorised dealers for converting one currency into another are taxable.
- Money transfer charges: Fees charged by banks or other financial institutions for transferring money is subject to GST.
- Charges for services related to physical money: Costs associated with activities like counting, sorting, or depositing large amounts of cash might be taxable.
GST on Securities Transactions
Financial products called securities are transferable and are used in both public and private markets to raise funds. The major categories of securities are debt, equities and hybrids. Financial securities are categorized into three:
- Equity securities: It represents ownership interest held by shareholders in a company or partnership in the form of shares. Holders of equity securities are not entitled to regular payments. They can profit from capital gains when they sell the securities when their value is increased.
- Debt Securities: Debt security signifies borrowed money that must be repaid. This is according to the size of the loan, interest rate, and renewal date. They are issued for a fixed term and must be redeemed at the end. Debt securities can be secured or unsecured.
- Hybrid Securities: The securities combine some characteristics of both debt and equity securities. Hybrid securities include equity warrants that give shareholders the right to purchase stock. Convertible bonds and preference shares are firm stocks whose payments of interest or other returns of capital can be prioritized above those of other investors.
The implementation of GST insecurities has been an evolving process. Initially, to promote the capital market, the taxation of securities under GST was exempted. This included stocks, bonds, and mutual funds. However, activities governing these transactions were brought under GST. These include activities like brokerage commissions & fees, Transfer fees and Management fees for mutual funds, etc.
Points to remember for GST compliance:
- GST Registration
Businesses that have revenue exceeding the threshold of Rs. 40 lakh for sale of goods, and Rs. 20 lakh for sale of services, depending on the situation, are required to register as regular taxable persons under GST. Some firms are required to register under the GST, and it is illegal for an organization to operate without registering. GST registration usually takes two to six business days.
- Filing Returns
A GST return is a document that contains information on all revenue and sales. It also includes all costs and purchases that a GST-registered taxpayer is obligated to report to the tax authorities. This is used by tax authorities to determine net tax liability. In the system, each registered dealer has to file organization. It includes Purchases, Sales, Output GST (On sales) and Input tax credit GST.
- Record Keeping and Documentation
Record-keeping practices to ensure compliance with financial regulations in GST. The major considerations are maintaining detailed records and keeping comprehensive records, encompassing invoices, purchase orders, and bank statements. This practice aids in transparency and facilitates efficient financial management.
- Payments and Penalties
It is essential to pay the GST dues on time to avoid late payment penalties. Knowing the penalty structure and interest charges that may apply for non-compliance is also vital.
International Perspectives on GST and Financial Transactions
India’s implementation of GST is anticipated to fuel its already expanding economy and yield huge impacts domestically and globally. In the international trade, the implementation of GST is expected to promote export. The removal of tax barriers among states is expected to stimulate economic growth. The simplification of tax processes is likely to attract increased foreign investment into the country.
As more nations adopt GST, India’s incorporation into the evolving global GST environment is signified. The implementation of GST in a country as extensive and diverse as India stands as a milestone in India’s ambitious agenda for growth. Despite facing several obstacles and criticism, we have successfully implemented GST in India. It is viewed as a substantial achievement that opens a new era of cooperative federalism. The establishment of the GST brings together the central and state governments to collectively determine tax policy.
Conclusion
On a concluding note, the investors and tax authorities must unravel how the GST will impact financial activities. The complexities of these transactions demand a framework that prevents errors.
The effect of GST on money and securities needs to be reviewed and improved upon regularly. Establishing a transparent, compliant, and efficient financial ecosystem requires teamwork and a well-versed understanding of GST on financial transactions. It needs to be understood along with the exemptions, inclusions, and ongoing discourses.