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Transaction tax stays with differential rates — Chidambaram exempts bond trades

Our Bureau

New Delhi , July 21

THE Finance Minister, Mr P. Chidambaram, today brought cheer to market players by announcing that the 0.15 per cent securities transaction tax (STT) proposed in his Budget would be confined to only delivery-based trade in equities, even while totally exempting sale and purchase of bonds from the levy.

Day-traders and arbitrageurs, who were the ones voicing maximum protest against the 0.15 per cent tax, have been virtually freed of the levy. This is because Mr Chidambaram has not only slashed the STT rate to 0.015 per cent on the value of their transactions, but also allowed them to set off their entire STT liability against the tax paid by them on business profits.

A similar concession has been made to derivative traders. The STT rate applicable on future and options trades has been pegged even lower at 0.01 per cent and these would again qualify for credit against tax on business profits.

Further, even in the case of the 0.15 per cent STT applicable on delivery-based trade in equity, the Finance Minister has made two significant modifications. Firstly, the 0.15 per cent rate would be split equally between the buyer and the seller. This is in contrast to Mr Chidambaram's original proposal, where the buyer was required to fork out the entire levy. Secondly, intermediaries who declare business profits on delivery-based transactions can also claim credit for STT against the tax paid by them on business profits.

What the Finance Minister has essentially done in his latest exercise is to differentiate between two sets of players — those who pay capital gains tax (like ordinary individual investors) and those paying income tax on business profits (day-traders, arbitrageurs and derivative dealers who undertake transactions in securities as a full-fledged business activity).

The original 0.15 per cent tax would now apply to only the first category, whereas the second lot of investors will pay lower STT rates, on which they can also claim set-off against tax paid on business profit. The idea here is to minimise the incidence of tax on intermediaries who provide liquidity and volumes to the market.

The other major change in the STT regime announced by Mr Chidambaram today was the move to treat units of equity-oriented mutual funds as `securities'. What this implies is that transactions in such units will henceforth attract the 0.15 per cent levy as in delivery-based equity trade in stock exchanges. Further, they will enjoy tax exemption on long-term capital gains, along with the reduction in the tax on short-term gains from 20 per cent to 10 per cent proposed in the 2004-05 Budget.

The mutual fund industry had, in fact, pleaded that units also be entitled to the exemption given on long-term capital gains on the grounds that the earlier proposed regime would have compelled investors to directly buy and sell shares in stock exchanges and by-pass the mutual funds route.

Mr Chidambaram also clarified that the decision to exempt trading in all bonds (including Government securities) from the STT would also cover units of mutual funds other than equity-oriented funds.

"We are committed to deepen the debt market in the country," the Finance Minister said in his reply to the Budget debate in the Lok Sabha. Bond market players had sought relief from the 0.15 per cent STT impost on the plea that margins in case of security transactions were wafer-thin compared to that on equities.

At the same time, trading in bonds and units of mutual funds other than equity-oriented funds will be subjected to the normal capital gains tax regime. This is because the zero per cent long-term capital gains tax and 10 per cent short-term capital gains tax is applicable only to securities attracting STT.

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