The capital market has not been writing any postcards to the finance minister over the last three years.
Expert view...
Vinod Kumar Sharma
The capital market has not been writing any postcards to the finance minister over the last three years. It’s happy with what it has and would thank the FM profusely, if he were to leave the tax provisions that govern investments by domestic investors and foreign institutional investors (FIIs) untouched.
While tax collections have generally been buoyant, contributions from capital markets have beaten other sectors. For the first 10 months of the fiscal year, the securities transaction tax (STT) collection is up 86% year-on-year (Y-o-Y). This is almost double the income tax collections.
Long-term capital gains tax exemption and dividends being made tax-free in the hands of investors have been the building blocks of this multi-year rally.
If they are touched or capital gains of FIIs are taxed, the markets will fall. Since STT, which has replaced long-term capital gains tax (LTCGT) on listed stocks, has raked in more moolah for the government, a sense of complacency has crept into marketmen’s thinking. They believe that a sane government would not like to kill its golden goose.
Experience has shown that a surcharge, which is imposed on account of a particular development, remains in vogue for many more years than is warranted. Therefore, it is within the realm of possibility that the government restricts the exemption from LTCGT only to the BSE 500 stocks and keeps STT on all stocks intact.
This should find favour with the Left and a section of the intelligentsia, which think that exemption to all listed entities has turned the markets into a laundry machine.
I wonder why the benefit of exemption has not been extended to stocks that are tendered for buyback in open offers. The apparent logic in denying the benefit is that STT has not been paid on the stocks, if they are tendered directly to the party making an open offer.
A way out is for the person/company making the offer should to pay an equivalent duty and deduct the amount from the proceeds.
While those who treat their income from stocks as business income get a set-off in tax for the STT paid, investors neither get deduction nor relief in tax for the STT paid.
Income from commodity derivatives is currently treated as speculative income, losses from which can only be set off against speculative gains. A trader who deals in the normal course in commodities in the cash market will have to carry forward his losses in the hedge transaction in the derivatives segment and pay taxes on his cash market transaction. There is a remote chance that a poll-bound government could consider imposing STT on commodity derivatives, to pad up its kitty.
The author is director and head of research, Anagram Securities
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