In a notification on Wednesday, the CBDT issued a set of guidelines to determine if a person is a trader or an investor.
MUMBAI: The government plans to tax investors and traders in shares separately.
In a notification on Wednesday, the Central Board of Direct Taxes (CBDT) issued a fresh set of guidelines to determine whether a person is a trader in stocks or an investor.
This follows its earlier guidelines of 1989 to distinguish between shares held as stock-in-trade and shares held as investments.
The board has invited comments from interested parties by May 25 after which it will issue the final instructions.
The move could open a Pandora's Box especially when it comes to assessing foreign institutional investors and hedge funds who currently pay a maximum 10% capital gains tax.
The guidelines do not distinguish between domestic and foreign stock market participants. "Logically, the step could mean a lower tax for investors and a higher tax for traders. But the government will have some explaining to do - and fast — on this score," said an analyst.
The CBDT said the following instructions will provide further guidelines — apart from the 1989 guidelines — for determining whether a person is a trader in stocks or an investor in stocks:
i. Whether the purchase and sale of securities was allied to his usual trade or business / was incidental to it or was an occasional independent activity.
ii. Whether the purchase is made solely with the intention of resale at a profit or for long term appreciation and/or for earning dividends and interest.
iii. Whether scale of activity is substantial.
iv. Whether transactions were entered into continuously and regularly during the assessment year.
v. Whether purchases are made out of own funds or borrowings.
vi. The stated objects in the memorandum and articles of association in the case of a corporate assessee.
vii. Typical holding period for securities bought and sold.
viii. Ratio of sales to purchases and holding.
ix. The time devoted to the activity and the extent to which it is the means of livelihood.
x. The characterisation of securities in the books of account and in balance sheet as stock in trade or investments.
xi. Whether the securities purchased or sold are listed or unlisted.
xii. Whether investment is in sister/related concerns or independent companies.
xiii. Whether transaction is by promoters of the company
xiv. Total number of stocks dealt in
xv. Whether money has been paid or received or whether these are only book entries
The CBDT has advised assessing officers that no single criterion listed above should be taken as decisive and the total effect of all these criteria must be considered to determine whether a person is an investor or a trader.
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