TAX NEWS - 2010

Securities transaction tax rate hinges on capital flow

Earlier plan was to abolish securities transaction tax (STT) under new tax regime.

The securities transaction tax (STT) is here to stay even under the proposed new regime for direct taxes slated to come into force from April 1 next year.

But the rate of securities transaction tax (STT) now hinges on the firming up of a revised taxation regime for capital gains and the flow of funds to the capital market, a senior Finance Ministry official said.

A new regime for taxation of capital gains has been proposed in the revised discussion paper on Direct Taxes Code released on Tuesday.

"When we say calibration in the revised paper, we mean that the rate of securities transaction tax (STT) would be decided based on the flow of funds into the capital market and also how the revised regime on capital gains is finalised," Mr S.S.N. Moorthy, CBDT Chairman, told Business Line here.

He said that the Central Board of Direct Taxes does not yet have a view on what the securities transaction tax (STT) rate should be.

In the revised discussion paper, the Finance Ministry has proposed that securities transaction tax (STT) would be levied under the new Direct Taxes Code. This is in variance to the position in the first discussion paper released in August 2009 wherein it was mentioned that securities transaction tax (STT) would be done away with.

The STT was sought to be abolished as the DTC had proposed to bring all capital gains to taxation as normal income while removing the distinction between long-term and short-term capital gains.

Now, in the revised paper, the Finance Ministry has proposed to withdraw the tax exemption on gains from transfer of listed shares/units of equity schemes held for more than one year.

Under the proposed regime, a deduction will be allowed at a specified percentage of gains, in respect of gains on transfer of listed equity shares/units of equity oriented funds held for more than one year from the end of financial year in which they were acquired.

No indexation would be allowed. The adjusted capital gain after deduction will be taxed at applicable rates. The specified percentage of deduction will be finalized in the context of overall tax rates.

The CBDT is now going in for the middle path by retaining STT (but calibrating the rate) and at the same time partly bringing to tax the capital gains made from transfer of listed shares held for more than a year, say tax experts.