GST for Traders – Do they need GST Registration?


GST is applicable if the aggregate turnover of a business exceeds the threshold limit. Once the business is registered under GST, it must charge GST on the sale of goods or services. It is applicable to manufacturers, traders and service providers. Does GST apply to stock traders also? The applicability of GST to trading in securities is a confusing question prevalent amongst traders. GST is not applicable to income from trading in stocks, shares, mutual funds, futures, options etc. Let us understand in detail.

Does having GST for Traders have any benefit?

What is recommended - having GSTIN and filing both GST and ITR or just simply file ITR no need of GST?

Does having GST for Traders have any benefit?

What is recommended - having GSTIN and filing both GST and ITR or just simply file ITR no need of GST?

Is GST applicable to Securities Traders?

It is mandatory to register under GST if the Aggregate Turnover exceeds the threshold limit of INR 40 Lakh (INR 20 Lakh for special category states) for sale of goods or INR 20 Lakh (INR 10 Lakh for special category states) for sale of services. As per Section 22 of CGST Act, Aggregate Turnover is the total sales value of taxable/exempt goods or services.

The GST Act specifically excludes Securities from the definition of Goods. As per Section 2(52), Goods means any movable property except money and securities. The definition of Services means anything other than goods, money and securities. Thus, trading in shares and securities is not considered as supply as per the GST Act and falls outside the purview of GST. Therefore, securities traders are not liable to register under GST.

However, it must be noted that if a broker is earning brokerage income from securities trading, GST registration is mandatory if such brokerage exceeds the threshold limit.

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Should I include Trading Turnover in Aggregate Turnover?

Trading Turnover is the turnover calculated for each trading segment as per the reporting requirements of the Income Tax Act.

Aggregate Turnover includes the sum of the sale of goods and services. Since the definition of goods and services excludes securities, the aggregate turnover should not include trading turnover to determine the applicability of GST Registration.

Trading Expenses on Securities Trading

Expenses incurred on trading in securities also includes CGST, SGST or IGST. This is the GST on expenses such as brokerage, transaction costs, turnover fees, etc that the trader pays for trading transactions. The trader can claim such expenses against the profit/loss from trading while filing the Income Tax Return on the income tax website.

GST for Traders – Reporting in ITR-3

Turnover as per ITR must match with sales reported in GST Return to avoid any mismatch notice. If the trader does not have GST Registration, he/she need not report details of GSTIN in the Income Tax Return. If the trader has income from any business other than securities trading and has GST Registration, it is advisable to report the trading turnover from securities trading under Non-GST Supply in the GST Return.

FAQs

Does securities also cover derivatives?

The GST Act excludes Securities from the definition of Goods. Securities shall have the same meaning as per Section 2 of Securities Contracts (Regulation) Act, 1956 and includes shares, scrips, stocks, bonds, debentures, debenture stock, other marketable securities and derivatives.

Is GST applicable on brokerage earned in Stock broking services?

Yes. A stockbroker provides stockbroking services that fall under the definition of ‘Services’ under GST. Therefore, such sale value must be included in Aggregate Turnover to determine the applicability of GST Registration.

My trading turnover from share trading exceeds INR 40 lacs. Do I need to register under GST?

Trading in securities does not fall under GST since the definition of ‘Goods’ and ‘Services’ as per the GST Act excludes securities. Therefore, even if the trading turnover exceeds the threshold limit, GST is not applicable.

How to File ITR for Zerodha?

A Zerodha Trader has to file ITR based on the income they have from trading in equity, mutual funds, or derivatives. Zerodha provides a Tax P&L Report to all its traders aggregating the trading transactions done during the financial year. Using the Tax P&L Report, the trader can determine which ITR Form to file and also determine the applicability of the Tax Audit. If you are a Zerodha Trader and looking to file your ITR (Income Tax Return), then you can refer to the detailed process below.

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Tax P&L Statement Tabs in Zerodha Explained

Therefore, as you can see from your image, your Tax P&L Statement is broken down into 7 different sections:

  • Equity Tax P&L Statement – consists of the following categories:
    • Equity Intraday – Trading in the stock cash market on a same-day basis. Thus, it would mean buying and selling on the same day itself.
    • Equity Delivery – Buying shares and holding them for a certain period of time is called delivery based trading. Hence, the shares you bought will be transferred in your Demat account. This consists of the following 2 sections:
      • Long term trades
      • Short term trades
  • Mutual Funds Tax P&L Statement
    • Debt Funds – Mutual funds that invest in fixed income securities for example bonds and treasury bills
    • Equity Mutual Funds – An equity fund is a mutual fund that invests principally in equity stocks example listed banks’ shares, FMCG, etc.
  • Futures and Options Tax P&L Statement
    • Equity Future – An agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller
    • Equity Options – In essence, equity options work in an extremely similar way to other options, such as forex or commodities. They offer the trader the right, but not the obligation, to purchase (or sell) a set amount of shares at a certain level (referred to as the ‘strike price’) before it expires. To buy an option, traders will pay a premium
  • Commodity Tax P&L Statement
    • Commodities Futures – Agreements to buy or sell a raw material at a specific date in the future at a particular price
    • Commodities Options – Contract permitting the option buyer the right, without obligation, to buy or sell an underlying asset in the form of a commodity, such as precious metals, oil, or agricultural products, at a designated price until a designated date
  • Currency Tax P&L Statement
    • Currency Futures – Futures contract to exchange one currency for another at a specified date in the future at a price that is fixed on the purchase date; see Foreign exchange derivative
    • Currency Options – Currency option is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain currency at a specified exchange rate on or before a specified date
  • Other Credits and Debits
    • This generally includes all charges and credits which are directly not associated with your trading activity
  • Equity Dividends Breakdown
    • A dividend is a token reward paid to the shareholders for their investment in a company’s equity. And therefore, it usually originates from the company’s net profits.

Explanation of Sub-Tabs of the Zerodha Tax P&L report

  • Realized Proft Breakdown
    • Realized profit is the profit that comes from a completed trade; in other words, a trade that has been exited. Realized profit is generally already deposited into the trader’s trading account. And it can be generally withdrawn from their trading account to a bank account.
  • Turnover Breakdown (Scripwise)
    • The definition of turnover is different for each type of trading transaction. Hence, in the case of Intraday Trading, the Turnover equals Absolute Profit. And, Absolute Profit is the sum of all positive and negative differences from all the transactions.
  • Other Debits/Credits including Service Tax
    • The other debits and credits include all charges and credits which are directly not associated with your trading activity. For example: some of the credits and debits can be explained as DP Charges, payment gateway charges, etc.
  • Account Head
    • Account head is generally a name under which particular types of transactions are recorded.
  • Short Term Trades
    • Short-term trading refers to trading strategies in the stock market or futures market in which the time duration between entry and exit is within a range of few hours to a few weeks. Hence it is referred to at as short term.
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Which ITR Form is Applicable to Zerodha?

To file an ITR is an annual process for Zerodha Traders. Based on the income situation, the taxpayer needs to file the prescribed ITR Form. The taxpayer should report incomes, calculate and pay taxes, claim TDS Credits and request refund for the overpayment of taxes while filing their ITR. The income tax department has also notified ITR Forms based on different income situations. To know which ITR Form is applicable to you, you can use the below calculator. 

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Taxpayers having income from trading need to file ITR-2 or ITR-3 and this is based on the nature of income from trading. In the case of Capital Gains Income, file ITR-2 and in case of Business Income, file ITR-3.

Due Date to file ITR for Zerodha

Income Tax Return(ITR) filing is done after the completion of a financial year. So, the due dates for ITR filing are as per section 139 of the income tax act. Due dates for different category of taxpayers are as follows:

Category

Due Date

Individuals to whom audit is not applicable

31st July of the Assessment Year

Companies

30th September of the Assessment Year

Individuals to whom audit is applicable

30th September of the Assessment Year

Individuals/ HUF who are partners in a firm and firm’s accounts are subject to audit

30th September of the Assessment Year

Additionally: the above due dates can be extended by the IT Department via order.

Tax Audit Applicability for Zerodha

Stock Traders generally trade in shares, securities, commodities and currency through online trading platforms. For Income Tax on tradingEquity Intraday, Equity F&O, Commodity Trading and Currency Trading is considered as a Business Income. Thus, it is important to determine the applicability of Tax Audit as per the provisions of Income Tax Act.

Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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The limit for turnover under Section 44AB is Rs. 1 Cr. Under Budget 2020, the turnover limit under Sec 44AB has been increased from Rs. 1 Cr to Rs. 5 Cr if the following conditions are satisfied:

  1. Cash Payments do not exceed 5% of the Total Payments in the financial year
    AND
  2. Cash Receipts do not exceed 5% of the Total Receipts in the financial year

Calculation of Trading Turnover for Zerodha

Any person having income from trading in shares and securities should report it as income from business and profession. Thus, to determine the applicability of Tax Audit as per the Income Tax Act, we should calculate Trading Turnover for such income. It is important to note that tax liability does not depend on Turnover. The trading turnover should be calculated only when the share trading income is considered as a business income and not when it is considered as capital gains income.

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FAQs

How to download the Tax P&L Statement from the Zerodha Console?

You can download the Tax P&L Statement from the Zerodha Console after logging into the portal and navigating through Reports > Tax P&L from the dashboard. Zerodha provides its traders with the option of downloading the Tax P&L Statement for all the segments.

Is Trading Turnover the same as Contract Turnover?

No. Contract Turnover is the sum of the purchase value and sales value. It is not applicable for income tax purposes. Trading Turnover or Business Turnover is the absolute profit that is: sum of positive and negative differences. This turnover is to determine the applicability of the tax audit and the applicable ITR form. Therefore, Trading Turnover is different from Contract Turnover.

I am a trader. Which ITR Form do I need to file for my Income Tax Return?

Taxpayers having income from trading need to file ITR-2 or ITR-3 based on the nature of income from trading. In the case of Capital Gains Income, file ITR-2 and in case of Business Income, file ITR-3.

Equity Trading Income: Delivery, Intraday, Futures & Options

Equity trading includes means buying and selling of various financial instruments such as delivery stocks, intraday, futures, and options, etc. The buying and selling of stocks and securities are done with an intention to create an investment portfolio or to earn profits due to fluctuations in prices.

Different forms of trading include Equity Delivery, Intraday, Futures, Options, Commodity Trading, Currency Trading, etc. Therefore, it is important to understand the different types of trading to calculate trading turnover, determine the applicability of Tax Audit, determine applicable ITR Form, calculate tax liability, etc. Let us understand the different types of equity, intraday, futures, and options trading in detail.

Equity Intraday Trading

When a trader buys an equity share and sells it on the same day, it is called Equity Intraday Trading. The intention is to earn profits from the fluctuation of prices in a single day. In the case of Equity Intraday Trading, there is no delivery of shares and therefore ownership is not transferred. For Income Tax, Equity Intraday Trading is considered as a Speculative Business Income since trading is done without the delivery of shares and with an intention to earn quick profits.

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Example of Equity Intraday Trading

Below is the Price of 1 Equity Share of Sun Pharma

Date Time Price (INR)
29th January 2020 11:00 AM 445
29th January 2020 2:30 PM  451

Akshay buys 100 shares of Sun Pharma on 29th January 2020 11:00 AM and sells them on 29th January 2020 2:30 PM

  • This is called Equity Intraday Trading since the shares are bought and sold on the same day
  • Profit = 100 shares * (451 – 445) = Rs. 600
  • Since the shares are not transferred to the trader’s Demat account, it is considered as a Speculative Business Income

Equity Delivery Trading

When a trader buys an equity share from the stock market and retains it for more than 1 day, it is called Equity Delivery Trading. It is called delivery trading because the intention of this purchase is to hold the share for a time long enough for the ownership to be transferred to the buyer. In this case, the share is delivered to the trader’s Demat account.

The intention is to earn short/long term capital gains. Equity Delivery Trading is considered as either Capital Gains or Non-Speculative Business Income.

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Types of Equity Shares

Equity shares are also referred to as ordinary shares. They are one of the most common kinds of shares. Equity shares are classified as per the type of share capital.

  • Authorised share capital: This is the maximum amount of capital a company can issue. A company can raise such capital by issuing equity shares. However, companies can increase the authorized share from time to time.
  • Issued share capital:
    • This is the portion of authorised capital that a company offers to its investors
    • For example, if the nominal value of one stock is INR 100 and a company has issued 40,000 such shares, then its issued share capital will be INR 40 lakh
  • Subscribed share capital:
    • This refers to the portion of issued capital upon which investors accept and agree
    • Referring to the above example, in case investors have purchased 25,000 shares of that company, then its subscribed capital would be INR 25 lakh. If investors buy all the stocks that a company has issued, then issued and subscribed equity shall be the same
  • Paid-up capital:
    • The amount of money investors pay against its holdings of a company’s stock is its paid-up capital
    • Since most companies accept the entire subscription amount at one go, and therefore, subscribed and paid capital are the same thing.
    • Furthermore, if a stock is trading at a premium, then that excess amount is accounted as shares premium

There are a few other types of shares

  • Right shares:
    • Right shares refer to the shares that a company issues to its existing shareholders to purchase new shares at a specific price within a particular period
    • In other words, the right shares are those new stocks on which existing stakeholders can lay claim before such issuing company opens them up to public trading
    • Such stocks are issued to protect the ownership rights of existing shareholders
    • Similar to bonus shares, companies issue the right shares on a pro-rata basis as well
  • Sweat equity shares:
    • Organizations often compensate employees or directors for their exceptionally well performance by issuing sweat equity shares to reward them
    • Several companies use this compensation method to enhance employee retention by endowing them with a stake in that organization’s assets and ownership
  • Bonus shares:
    • Bonus shares are those stocks that companies issue to the existing shareholders without any additional charge
    • Usually, companies provide these bonus shares to shareholders instead of paying out dividends
    • Furthermore, organizations issue bonus shares on a pro-rata basis.
    • So, if Mr. Ansh holds 100 shares of ITC Ltd and the company announces its decision to issue 1:4 as a bonus, then he will receive 25 additional shares for free
  • Voting and non-voting shares:
    • Generally, most types of equity shares carry voting rights because of the stake in ownership it entails.
    • However, in some cases, companies can issue shares with the condition that it will confer differential or no voting right at all to such shareholders

Example of Equity Delivery Trading

Below is the Price of 1 Equity Share of Sun Pharma

Date Time Price (INR)
29th January 2020 11:00 AM  445
29th January 2020 2:30 PM 451
30th April 2020 1:00 PM 441

Akshay buys 100 shares of Sun Pharma on 29th January 2020 11:00 AM and sells them on 30th April 2020 1:00 PM

Equity Futures

When a trader expects the price of a share to move up or move down in the near future, they can enter into a Futures Contract. Therefore, a Futures contract is an agreement to buy or sell an underlying asset on a future date at a pre-agreed price. The trader is required to deposit advance money called ‘Margin’ with the brokerage house to ensure that they do not default in case of a loss. Once the trader squares off the futures position or the Futures Contract expires, the margins are unblocked. In the case of a Futures Contract, the buyer’s gain equals the seller’s loss and vice versa.

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Example of Futures Trading

The price of the Futures contracts constantly fluctuates based on demand. Therefore, in the developed market today the futures price is based on demand and supply and one can check the average price on the stock exchange to see the price at which the future is available for them to buy.

  • Underlying Asset – Sun Pharma Share
  • Current Price of Underlying Asset – Rs. 451.55
    This is the current price of the stock which changes based on the trading done.
  • Price of Futures – Rs. 452
    This is the minimum buy price of one shares’ future and also fluctuates with demand for the futures contract.
  • Minimum Lot Size – 1250
    Lot Size is the minimum number of shares that a trader needs to buy or sell to enter a Futures Contract. So it means that the trader should buy or sell in multiples of 1250 shares of Sun Pharma to enter into this Futures Contract.
  • Current Date– 29th January 2020
  • Expiry Date – 30th Jan 2020
    This is the date on which the Futures Contract would expire. The Futures Contract expires on the last Thursday of the month. So in the case of Sun Pharma, the contract would expire on 30th Jan 2020 which is the last Thursday of January

Interpretation of Example: Since the expiry date is in less than a day and the futures price is close to the shares’ current price. However, this also means that the delivery of this share on the future date will be at Rs. 452 regardless of the current price of the share then i.e. even if the shares’ price was to increase to Rs. 460 on 30th Jan 2020 you would still buy them for Rs. 452. The future allows you protection from price fluctuation.

Given below is the snapshot of Futures Contract of Sun Pharma:

Options Trading

Options is a contract with the right to buy or right to sell an underlying asset at an agreed-upon price today (strike price) on a specified future date. Hence, the buyer of an Option receives the ‘Right to Buy’ or ‘Right to Sell’ the underlying asset at a specified future date. Therefore, the seller of an Option has the ‘Obligation to Buy’ or ‘Obligation to Sell’ the underlying asset at a specified future date. The buyer may or may not exercise the option and thus pays a premium to the seller to attain this right. This is called ‘Option Premium’.

  • Buyer of Call Option – Right to Buy the underlying asset at the strike price on a future date
  • Buyer of Put Option – Right to Sell the underlying asset at the strike price on a future date
  • Seller of Call Option – Obligation to Buy the underlying asset at the strike price on a future date
  • Seller of Put Option – Obligation to Sell the underlying asset at the strike price on a future date
Buyer of an Option has a limited loss (premium paid) and unlimited profit while the Seller of an Option has an unlimited loss and limited profit (premium received)
Tip
Buyer of an Option has a limited loss (premium paid) and unlimited profit while the Seller of an Option has an unlimited loss and limited profit (premium received)

Example of Call Option

Akshay buys a Call Option on Nifty Index from Raj at a price of Rs. 1000 and expiry of one month from today. Akshay pays a premium of Rs.10 to Raj.

  • Buyer of Call Option – Akshay
  • Seller of Call Option – Raj
  • Option Premium – Rs.10
  • Expiry of Contract – 1 month
  • Strike Price or Exercise Price – Rs. 1000

If the price of Nifty on expiry is Rs. 1200

  • Akshay’s Call Option is ‘in the money’. He will exercise the Call Option
  • So, Akshay has the ‘Right to Buy’ Nifty at Rs.1000 from Raj
  • Therefore, Akshay’s Total Profit = 1200 – 1000 – 10 = Rs. 190
  • And since Raj has the ‘Obligation to Sell’ Nifty at Rs.1000 to Akshay
  • Raj’s Total Loss = 1000 – 1200 + 10 = Rs. -190

If the price of Nifty on expiry is Rs. 800

  • Akshay’s Call Option is ‘out of the money’. Therefore, he will not exercise the Call Option
  • And hence, The Call Option lapses
  • Therefore, Akshay’s Total Loss = Rs. -10
  • And Raj’s Total Profit = Rs. 10

Example of Put Option

Akshay buys a Put Option on Nifty Index from Raj at a price of Rs. 1000 and expiry of one month from today. And, Akshay pays a premium of Rs.10 to Raj.

  • Buyer of Put Option – Akshay
  • Seller of Put Option – Raj
  • Option Premium – Rs.10
  • Expiry of Contract – 1 month
  • Strike Price or Exercise Price – Rs. 1000

If the price of Nifty on expiry is Rs. 800

  • Akshay’s Put Option is ‘in the money’. So, he will exercise the Put Option
  • And so, Akshay has the ‘Right to Sell’ Nifty at Rs. 1000 to Raj
  • Therefore, Akshay’s Total Profit = 1000 – 800 – 10 = Rs. 190
  • Since Raj has the ‘Obligation to Buy’ Nifty at Rs. 1000 from Akshay
  • Therefore, Raj’s Total Loss = 800 – 1000 + 10 = Rs. -190

If the price of Nifty on expiry is Rs. 1200

  • Akshay’s Put Option is ‘out of the money’. So, he will not exercise the Put Option
  • Hence, the Put Option lapses
  • And Akshay’s Total Loss = Rs. -10
  • Therefore, Raj’s Total Profit = Rs. 10
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FAQs

How do I calculate my Trading Turnover?

Trading turnover is calculated in case of equity intraday, futures, and options. In the case of Equity Intraday Trading, Absolute Profit is Trading Turnover. Trading turnover is required for understanding Tax applicability and Tax audit applicability as well.

What is Absolute Profit?

Absolute Profit means the sum of positive and negative differences in a trade transaction. Eg: Loss from Scrip X is Rs. -5000 and profit from Scrip Y are Rs. 8000, absolute profit = 5000+8000 = Rs. 13,000.

Is Trading Turnover same as Contract Turnover?

No. Trading Turnover is different than Contract Turnover.
Contract Turnover is the sum of the purchase value and sales value. It is not considered for income tax purposes. Trading Turnover or Business Turnover is the absolute profit i.e. sum of positive and negative differences. This turnover is considered to determine the applicability of the tax audit and the applicable ITR form.