The Hindu Business Line : A sure way to securities revenue

IN 1997, Mr Chidambaram made dividends tax-free in the hands of the recipients. Instead, he shifted the tax liability on to the companies distributing them. The distribution tax scheme has had a chequered history even since, with the rate being tinkered with and the scheme itself being given a burial before it was exhumed a year later almost post-haste.

The detractors of the scheme have had it that the scheme lets tycoons get away with a small vicarious impost while imposing the same levy on non-taxpayers, besides allowing the problem of double taxation of dividend to fester.

But Mr Chidambaram seems to have had his eyes more on revenue considerations than anything else — with companies being made liable to pay tax on dividend, evasion has become virtually impossible. Tax on dividend no longer has to be collected from millions of shareholders but from handful of companies. Monitoring in the wake of the scheme has decidedly become easier. Anecdotal evidence suggests that the collections have swelled.

Seven years down, there seems to be a sense of déjà vu. Mr Chidambaram has once again gone for the jugular. This time round he has trained his guns on the other form of reward to the shareholders — capital gains. In 1997, he let off the shareholders and held the corporates accountable as far as tax on dividend was concerned.

Now he has once again let off the investors almost completely except to the extent of tax on short-term capital gains and made the stock exchanges responsible for tax on earning from secondary markets. If in 1997 the name of the tax was distribution tax, this time round it is securities transactions tax. If the earlier one was soft; the proposed one is softer. Or so it would appear.

But then Mr Chidambaram's messages take time to sink in — witness his dramatic but deceptive announcement in his recent Budget speech about tax-free limit that had everyone drooling. The tax on securities transactions is only 0.15 per cent — Rs 15 per Rs 10,000, seemingly a pittance. But relate it to the volume of transactions in the bourses in a financial year, it would be sizeable especially given the definition of volume of transaction — the tax of 0.15 per cent, for example, will not be on the option premium alone but on the strike price as well. There is no reason why this should be so. Tax ought to be only on the option premium because that is the commodity presently being bought. Be that as it may, by targeting the stock exchange, Mr Chidambaram has made tax evasion impossible. To collect distribution tax he has to contend only with a few thousand companies; similarly he has practically to contend with just two bourses — the NSE and the BSE — for collecting the securities transactions tax. But in his eagerness to foil tax evasion, he has, if inadvertently, introduced a few inequities just the way he did in 1997. If in 1997 he let off the tycoons, this time around he is going to let off lightly investors of all hues and sizes.

In the wake of this proposal, even dealers in shares would be tantalised into morphing themselves into investors. As it is, despite several judgments of the apex court, the line between an investor and dealer is blurred. With more and more dealers jumping into the investor bandwagon, one class of income — capital gains — would be indulged. This is bound to cause resentment amongst earners of other forms of income, especially the salaried class who are having to bear the brunt.

But, as pointed out earlier, Mr Chidambaram seems to be more concerned with the exchequer — like distribution tax which most certainly has been raking in more for the Government, securities transactions tax would too most certainly outstrip the possible collections by way of capital gains tax. In his scheme of things equity perhaps take the back seat.

Critics may also cavil that securities transactions tax is not an income-tax at all but a purchase tax. But Mr Chidambaram is not going to lose sleep over it. Target the source seems to be his mantra. The next Budget may therefore see presumptive taxation schemes hogging the limelight.

(The author is a Delhi-based chartered accountant.)