Jan 19, 2019

Brokerages set up shop in Daman to avail tax exemption

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The Union Territory of Daman and Diu is emerging as a hub for Indian brokerages thanks to a favourable tax law. The region with less than three lakh population is home to over 500 brokerages, which is one-fifth of the number of such firms across the country, said industry officials. The rush to set up shop in Daman and Diu is to take advantage of exemption on stamp duty, which results in cost savings especially for smaller broking firms.

Any trade in equities is subject to various taxes including stamp duty. As a measure to attract capital into the Union Territory, the central government has exempted businesses in Daman from paying any stamp duty. This provides a tax arbitrage for brokerages especially the ones who clock large volumes in proprietary trading.

Daman and Diu is the registered home to more brokerages than some of the large states including Karnataka, Tamil Nadu or Andhra Pradesh. Maharashtra remains the state with the highest broker registrations.

Most brokerages registered in Daman run their operations in the country’s financial capital Mumbai. The address of incorporation in the Union Territory is often a post box address or a small one-room place with one or two staff members.

One broker who spoke to ET requesting anonymity said there was nothing illegal about incorporating a company out of a tax favorable jurisdiction and not just brokerages but some of the non-banking financial companies (NBFCs) and smaller law firms have also used the same route.

Daman Offers Tax Sops

Capital market regulator Sebi had raised questions about the high brokerage registrations in Daman.

“We explained to Sebi that no laws were being broken,” the broker said.

Stamp duties are levied by state governments and they vary across the country. States like Maharashtra charge the tax at a rate of 0.001 per cent, while states like Bihar levy the stamp duty at 0.25 per cent, data from official websites showed. While the quantum of tax savings looks less, it helps those brokers who trade in bulk quantity. For instance, if a broker trades in shares worth Rs 10 lakh a day, a Daman registration would save it about Rs 4 lakh a year compared to a Mumbaibased broker, while he would be saving Rs 9 lakh compared to a broker based out of Patna.

“Some of the brokers save about Rs 15-20 lakh a year on stamp duty and these savings keep accruing year after year,” said Alok Churiwala, managing director, Churiwala Securities. “In a low-margin business like broking, every penny matters,”

Legal experts say, there are two kinds of incentives that government gives for places like Daman – one to set up heavy industries and generate employment, while the other is to increase the commercial activity of the place. The stamp duty exemption falls in the latter category. “Brokerages operating out of Daman will certainly increase the commercial activity around the place and hence it is not in violation of the law,” said Pavan Vijay, founder, Corporate Professionals. “However, spirit of law is a different question since they don’t generate employment or provide any major benefits for the jurisdiction.”

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