The Hindu Business Line : Financial fine-tuning

In the earlier two Budgets, the Finance Minister had introduced several new levies, such as the securities transaction tax (STT), the banking cash transactions tax (BCTT) and the fringe benefit tax (FBT). It was hoped that the BCTT would be withdrawn, as its very objectives can be achieved by better utilisation of the Money Laundering Act, which has thus far remained dormant. Far from withdrawing the tax, Para 171 of the speech justifies it, pointing out how it left a tax trail and the Department was able to ferret out laundered money of Rs 1,500 crore in 18 months. The BCTT is, therefore, here to stay.

On the FBT front, the Finance Minister did not seem convinced about the objections raised about the legality and constitutionality of the levy. He has, however, modified and liberalised the provisions. FBT is being challenged in several High Courts and the verdict is keenly awaited. The revenue from the levy in the first year of its introduction is estimated at Rs 2,700 crore. With the modification, the revenue is likely to be much lower. The compliance costs will, however, continue to remain high.

The rationale behind the upward revision of STT is the buoyant stock market. Will the rates be revised downwards when the market goes down? Probably, the bulk of the additional resource mobilisation of Rs 4,000 crore is expected to come from the upward revision of the STT.

STT saves one the bother of paying long-term capital gains tax in respect of shares and securities. It is borne both by the buyer and the seller, though there is no logic in forcing the buyer to pay up. Why should not the benefit of avoiding capital-gains tax be extended to those who make short-term capital gains?

The exemption given to shares and securities from payment of long-term capital gains tax is discriminatory, as it does not apply to other long-term assets. The idea behind the exemption was to induce foreign institutional investors (FIIs) to stay invested in the Indian market for at least a year. With dividends in the hands of the shareholder exempt from taxation, the saving on long-term capital gains would go a long way in promoting the equity cult. The Finance Ministry should indicate how much revenue was foregone by the abolition of the tax on long-term gain on securities and how much of it has been compensated by the STT levy.

Not too happy about the exemption, the Finance Bill has amended the term `book profit' in the Explanation to Section 115 JB (2). Book profits will now include long-term capital gains made by a company on shares and securities.

(The author is a former Chief Commissioner of Income-Tax.)