The Finance Ministry is set to reap the benefits of the boom in the primary stock market.  As companies queue up with their maiden and follow-on offerings, the ministry is preparing to stocks on equity and commodity markets under the service tax net. In case the proposal becomes a law, fees for all listing will attract a service tax @12.5%.

“Unlike registration fees, fees charged by registrar of companies, the listing fees paid to the stock exchanges is not a statutory payment .Listing of securities can be construed as a service rendered by stock exchanges and, hence, taxed,”

There are some components in the initial public offerings (IPO) process like the underwriters’ fee and the advertising & printing services have come under the service tax net. However, other expenses like layers’ fee and even the nominal fee paid to the market regulator – Securities and Exchange Board of India for clearing the IPO are still out of the service tax net.

Currently, fees for listing on the exchanges are directly proportional to a company’s equity capital. For example, the fee for initial listing on the BSE is Rs. 20,000/- and thereafter, annual listing fee of Rs. 10,000/- is charged for companies with a paid-up capital of upto Rs.5 Crore.

During financial year 2005-06, Bombay Stock Exchange (BSE) had collected about Rs.16.3 crore as listing fee while for the National Stock Exchange (NSE) the corresponding figure was Rs.   8.44 crore. In addition, the bourses had also collected book binding fees. While NSE collected Rs. 9.72 crore for facilitating book binding process during public offers and de-listing, BSE had collected about Rs.6.14 crore. Fees for the two bourses, under all these heads, add up to Rs. 40.7 crore.

These fees are expected shown a much higher figure at the end of the current financial year. For one, during the current financial year about 50 public offers have been completed and over 30  are  expected to hit the market before the end of the year. This compares favorably   with about 70 issues during the financial year 2005-06. these listing will also push up the book binding fees for the current year substantially.

In addition, companies with large equity base have to fork out higher listing fees. Reliance petroleum and Crain India are two such companies each with a large equity base and were listed in financial year 2006-2007. Real estate major DLF is another company which has a huge equity base and is waiting to complete its IPO process to get listed on the Bombay stock exchange and the national stock exchange in a few months. These listings are also expected to lead to higher listing and book-binding fees for the two exchanges.

In clander year 2007 alone, public offers worth Rs 45000 Crores are set to hit the market if the current market boom, according to a recent study. Offer documents to raise Rs 28376 Crores have been filed with SEBI. Companies raised Rs 24432 Crores through public offers in 2006

Even some more aspects of the IPO business can be brought under the Tax Net, experts suggest. For instance, when an IPO is over subscribed, the companies part the excess funds with a bank which pays a 6-7 % interest as a “Fee” to the companies “These interest or fee paid by a bank may also be brought under the service tax net, “

Source: The Times of India. New Delhi, Dated 24.01.2007