TAX NEWS - June 2010

Proposals for Rate Revision and Tax Abolition on Securities Transaction

According to a senior official in the finance ministry, during the process of overhaul of the capital gains tax, currently underway, the government will also review the securities transaction tax, or STT. It has been a demand from the investors, pending for long enough to abolish this tax. The government is considering both the options of either revising the existing tax rate or scrapping it altogether. The government will take this decision based on the convenience of revenue, after calibrating the tax on capital gains. According to SSN Moorthy, the chairman of Central Board of Direct Taxes, the government is still undecided over whether to scrap the tax altogether or merge it with the capital gains tax.

The recommendations of the original code were to scrap ST altogether and instead levy the tax on capital gains. Currently investors who are charged with securities transaction tax do not have to pay capital gains tax if they sell their shares an year after holding them. A discussion paper on the code that has been revised proposes readjustment of the securities transaction tax as per the new rules on capital gains. Investors, who after one year of holding shares, sell them will be favored by the new rules which will soften the tax blow for them. A capital gains deduction is being planned to be allowed, which will then be added to the total income of the taxpayers. The taxpayers would have to follow the slabs to pay the income tax. This concession, however, will not favor cases where the shares are sold in less than a year.

The future of securities transaction tax will depend on the deduction amount that is allowed on the longer term capital gains. This tax, which is levied on securities markets' transaction was introduced in the fiscal year 2004-2005 and is charged on sale or purchase of equity shares, mutual fund units, bonds or derivatives.