The Hindu Business Line : Taxing times for stock market

Investors and traders on stock and commodity exchanges have to grapple with many unfriendly measures from the Union Budget of 2008. The hike in short-term capital gains tax, bringing transactions in the commodity exchanges under the transaction tax net, and spreading the service tax net to cover stock and commodity exchanges as well as the depository and clearing corporations could affect volumes and dent sentiment on the exchanges.

Short-term capital gains tax

The amendment of sections 111A to increase tax on the transfer of short-term capital asset from 10 to 15 per cent has been an unkind cut since the traders and investors would have to shell out 50 per cent more by way of short-term capital gains tax. Though this can be called a prudent move to curb speculation and induce investors to invest for the long-term, traders are needed to provide liquidity and depth to the markets and aid in efficient price discovery. Section 115AD of the Income Tax Act, which deals with the capital gains tax to be paid by FIIs, has also been amended, thus hiking the capital gains tax payable by them as well.

With the transaction and impact cost of trading in India being among the highest in the world, such a measure may irk external investors who are reeling under the impact of the restrictions issued on participatory notes.

Commodity Transaction Tax

The introduction of commodity transaction tax at the same rates as the securities transaction tax would have an adverse affect on the commodity exchanges that are already grappling with falling turnover.

Introduction of CTT of .017 of the option premium or the cost of commodity derivative for the seller and 0.125 on the buyers of options will greatly increase the transaction and impact cost of commodity traders who trade with wafer-thin margins.

Introduction of such prohibitive taxes could have been withheld until the commodity trading in our country was well on its feet.

Amendment to STT

Changed rules for calculating the STT on options such as levying the tax only on option premium in the case of a seller and only if the option is exercised in case of buyers would marginally decrease the tax payable by traders in these instruments.

Amending the rules for offsetting the STT in case the securities transaction falls under the head ‘profit and gains from business or profession’ by considering it as a deduction under section 36 instead of a rebate under section 88E is a positive since the rebate under section 88E was capped by the total tax payable on securities transaction.

Service tax

The service tax net has been widened to include stock and commodity exchanges and depository and clearing houses. The taxes paid by these entities would be passed on to the end-users, who are again the investors and traders on the stock and commodity markets.

Other proposals

The Finance Minister has mooted the introduction of exchange traded currency and interest rate futures. These instruments can impart liquidity in the forex markets.

But it is debatable whether this is the right time to introduce credit derivatives given the havoc being wreaked by these instruments in the global financial markets.

The proposal to separate the embedded equity portion of domestic convertible bonds and making this portion tradable on the exchanges will make such bonds more attractive and make it easier for promoters to raise funds through this route.

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