Financial Daily from THE HINDU group of publications
Monday, May 22, 2006
Financial Daily from THE HINDU group of publications Monday, May 22, 2006 |
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Stock Markets Markets - Taxation D. Murali
Chennai , May 21 Investors have been a worried lot. On the one side, bear hammering has been relentless. And, on the other, the taxman's missives are giving everybody sleepless nights. Thus, despite clarifications, trickling in fits and starts, including from the Finance Minister, a major question in the minds of many is whether they are investors or traders, going by the latest draft instructions from the tax department. For instance, Mr Mundra, a reader from Mumbai, mails in to ask, "Don't you think that the FM should clarify immediately that once you've paid STT (Securities Transactions Tax), it is the assessee who should have the choice whether he is a trader or a investor?" He is worried that the new instructions, when finalised, could permit the taxman to push ordinary investors to be called traders, and then tax them at 33 per cent. "Tax, interest and penalty might all add to more than the investment value," he fears. On this, Mr V. Ranganathan of Ernst & Young, Chennai says, "Mundra's anxieties echo the views of small investors who today tend to trade a little more often because of the temptations of the market." With the introduction of STT, it is appropriate that the controversy on the method of taxation should be given a quietus, says Mr Ranganathan. "It is only such investors who classify themselves as doing a business, with proper accounts, who should be treated so."
Long-term capital gains
Another issue making top news these days is LTCG or long-term capital gains. The Left wants tax to be reinstated on such gains, while the FM has responded by saying there are no plans to re-introduce tax on LTCG. "It is necessary to disincentivise the temptation to shift, on the part of taxpayer, from capital gain classification to business head, by disabling any benefit of set-off or carry forward of short term or long term losses on shares," opines Mr Ranganathan. "It is only logical, when the taxation on shares or listed securities has been put under concessional scheme, that the facility for set-off of losses is not extended." A suggestion that should find takers in both camps of the LTCG tug-of-war, for the half way ground it finds. In such a suggested scheme of things, would there be a motivation for a trader to call himself an investor? "The answer, in general, would be no," states Mr Ranganathan. Reason? "Because losses are as much a reality as profits in the markets, and a trader would typically like to keep the option to set off losses." Tax policy and the statute should automatically direct the behaviour of the taxpayer, rather than promote a discretionary approach on the part of AO, insists Mr Ranganathan. "Else, the whole regime would smack of indefiniteness and uncertainty." In which case, comprehending the tax provisions could be tougher than deciphering the charts.
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