Previous Service Tax Valuation Rules
Until the introduction of new taxation rules for brokers, broking houses deducted the stamp duty charges from their earnings (brokerage commission). By doing so, their net income, on which the service tax was computed, was an amount which was actually lower than the commission earned.

The tax authorities were lax which allowed the brokers to make use of this flaw in the service tax rules. Although retail transactions are of small amounts by nature and would make little difference, but where trades involve bulk transactions from the FIIs, the result was hefty amount of earnings (in form of commissions) to the brokers which was going un-taxed in their hands.

To overcome these loopholes in the previous rules, new rules were introduced as per which service tax would be computed on the gross consideration, (i.e. service tax would be levied on the entire commission earned and not the amount arrived at after deducting stamp duty). Brokers are also provided with a few deductions from income, but stamp duty is not included in those deductions.

Introduction of New Service Tax Valuation Rules
As per the recent introduction of the new service tax valuation rules, a broker has to pay service tax on brokerage income (on an average, brokerage income is roughly about 0.5% of the transaction value). Apart from that a broker is also required to pay a stamp duty of 0.01%.

Additional Tax in the Future
Moreover there are chances that service tax may be levied on entry load and exit load on mutual funds as well. Enforcement of this new rule would imply that investors would have to pay additional charges in the form of service tax while buying or selling units of mutual funds. However, this would imply that investors would have to bear the burden of double taxation.