Not all's lost for market

While there was little in the Budget to cheer equity investors, sub-brokers have something to thank the finance minister for.

The proposal to exclude sub-broking services from the ambit of service tax will benefit over 41,000 equity sub brokers (as per Dun & Bradstreet estimates), empanelled with various brokerages across the country. “The definition of a stock broker is being amended to exclude the sub broker from its ambit.

As a consequence, sub-brokers will be outside the purview of service tax,” Memorandum 3 of the Budget document clarified. The main brokers are still required to remit service tax to the government.

The move will increase the earnings of sub brokers who have been paying 10.3% service tax on the sub brokerage earned (from the main broker), according to tax experts. “The exemption will help sub brokers to earn a bit more, as they will no longer have to remit service tax on sub brokerage,” said Rohit Jain of Economic Laws Practice, a consulting firm specialising in corporate law and taxation.

The move to exclude sub brokers from the service tax net comes at a time when high-profile brokers are partnering with individuals to increase reach and cut (business) start-up costs. According to industry sources, brokers, in their bid to cut infrastructure cost, are shutting down branches in smaller towns and designating sub brokers on profit- (or loss) sharing basis to carry out business.

According to a highly-placed official of a listed brokerage, sub-brokers usually get a raw deal. “During the bull run, brokers were not interested in sharing profits with sub brokers. Now when times are bad and the probability for incurring losses is more, brokers are looking for tie-ups on a revenue-sharing model. The exclusion of service tax levy will help them earn a bigger portion of the brokerage,” said a senior official of a listed brokerage firm.

In times of buoyant markets, brokers call the shots, forcing sub brokers for 60-40 revenue-sharing agreement, favouring brokers. However, with markets entering a bear phase, profit-sharing ratios have turned in favour of sub brokers. There have been instances where brokers have agreed for even a 50-50 arrangement with the sub broker.