What is Dematerialization of shares?

The process of Dematerialization of shares was introduced to convert the whole Capital Market into electronic mode. Dematerialization, in simple terms, is a process of converting physical shares into electronic mode which is maintained in an account with the Depository Participant. The Account in which the shares are maintained is termed as the Demat Account.

For the purpose of converting physical shares into electronic mode, the Depositories work as the Organizations responsible for maintaining securities in electronic mode. For this reason, the Depositories are also termed as Banks.

Currently, there are two depositories registered with SEBI namely National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).

The intermediaries through which Depository Services can be availed by investors are termed as Depository Participants.

Why Demat over Physical?
Dematerialization offers flexibility along with security and convenience. Dealing in Demat shares is beneficial to stakeholders, be it investors, brokers or Companies, in various ways.

Following is a brief list of advantages available to Demat shares for which the same is preferred over physical shares by investors:

• It is cost friendly to the investors as it does not involve any documentation.
• Efficiency and timeliness of the process is also maintained while dealing in Demat format.
• Investors save stamp duty while transferring shares in Demat Format.
• There is no risk of duplication of shares and loss of important certificates.

How to Demat your Physical Shares?
Let us learn about the procedure through which physical shares can be converted into Demat Shares:

1. An investor intending to dematerialise its securities needs to open a demat account with a Depository Participant (DP) by duly filling the Account Opening Form and furnishing relevant details.
2. Once the Account is successfully opened, the next step is to apply for Demat of Shares by filling the Dematerialization Requisition Form (DRF).
3. The DRF form should be duly filled in with number of certificates, no. and type of securities.
4. The DRF form has to be furnished to the concerned Authorities along with the Original Physical Share Certificates of the Company.
5. Once the Physical Certificates are verified by the concerned Authorities, they are converted into their respective electronic forms.
6. After the Demat of shares, the DP will submit all the Certificates to the concerned Registrar and Transfer Agent.
7. Once the Registrar confirms the Dematerialization request, it dematerializes all the certificates, destroys the physical certificates and updates the same in its records.
8. Once the confirmation of Dematerialization is sent to the Depository, the same in updated to the DP.
9. The DP in turn updates the account of the investor, and a credit in holding of shares is reflected in the investor’s account electronically.

Equalization Levy

The digital economy in India is growing at a rapid pace by each passing year. Till recently, most of the Non Resident companies, which form an integral part of providing digital services did not have to pay any tax in India. Neither were they subjected to any withholding taxes, since the performance for the services were not executed in India. Moreover, as they do not have a Permanent Establishment in India, their revenue cannot be attributed to the operations in India. Hence, no tax applies on the same.

Equalization Levy is a recent tax structure introduced in India in order to impose tax on specified services provided by Non-Residents, who earn revenue from India in excess of the threshold prescribed.

Any person or entity which makes a payment exceeding Rs 1 lakh in a financial year to a non-resident technology company for some B2B {Business to Business Services} needs to withhold 6% as Equalization Levy, on the gross amount being paid out.

Equalization Levy
Equalization Levy

Scope of Levy:

  • Equalization Levy is charged only on non-residents of India.
  • If a company is non-resident today and it opens a subsidiary or a PE in India to provide e-commerce services in India, then the Indian subsidiary/PE will be liable to normal Indian Income-tax only and will escape Equalization Levy.
  • This tax is applicable on B2B services and NOT on B2C {Business to Consumer} goods and services.
  • The tax is applicable to only those companies which have no permanent establishment in India.

Scope of Specified Services:

  • Online advertisements
  • Any provision for digital advertising space or any facility or service for the purpose of online advertisement.
  • Any other service which may be notified by the government.

Deposit and Return of Equalization Levy:

The Equalization Levy withheld by the resident buyer shall be deposited by him to the government before the 7th of the succeeding month.

A return of EL needs to be filed on or before the 30th June immediately following the financial year. The responsibility of payment of tax and filing of return is on the Indian Resident making the payment for the Services.

If the Indian resident assessee does not pay tax to the Government of India, he will be liable to tax, interest and penalty under Chapter VIII of the Finance Act. He will also be liable to disallowance of expenditure from his business income under Section 40 (a) (ib).

This law imposes no responsibilities on the Non-Resident Service provider.

Although Equalization is a welcome move by the government, given that the responsibility of deduction of equalization levy has been fastened on the remitter, there is a high probability that non-resident service provider may seek net of tax payments i.e. any tax cost may have to be borne by Indian customer.

On account of limited bargaining power, this proves to be a setback for startups since they would be required to incur higher advertising cost, thus increasing their cost of doing business.