The Hindu Business Line : CBDT draft circular

This is with reference to `Drafted damage' (Business Line, May 20). It has been said that the criteria in the draft circular should have been put in place at the time when exemption from tax of profits on sale of listed securities was brought in to draw more investors to the stock market and help capital formation. An article the same day, "Is the FM keen on joining the Sensex party?" gave the impression that the 2004 amendments were aimed at assured revenues by treating profits as gains than from trading in shares. These give a one-sided view.

The 2004 amendments were not intended to treat trading as capital gain, but were to remove differential tax treatment of short- and long-term capital gains.

The distinction between an investor and a trader in securities — that is, an investor realising short- and long-term capital gains, and a trader having `profits and gains of business' arising from transactions chargeable to the Securities Transaction Tax — was maintained, through Section 88E. Whereas for the trader, the STT was deductible from the income-tax on the business income arising from such transactions, this was not so for the investor. The rebate of STT, under Section 88E, was allowable against `transactions entered in the course of business,' from the amount of I-T on such income. Thus, to allow the STT rebate, the assessing officer has to make a distinction, between an investor and a trader, as between `business income' and `short- term capital gains.' The 2004 amendments were never intended to treat `business income' as `investment income' or vice versa, as suggested in the editorial. The issue of the circular is only to safeguard the AO, so that he may not treat a trader as investor or vice versa. All along, the FIIs were claiming that their income was `capital gains' from `investment', taxable in Mauritius. In the absence of tax on capital gains in Mauritius, they were escaping tax, both in India and Mauritius. Only Fidelity Advisory Series VIII claimed such income to be from `business'. By AAR's decision, it escaped tax on `business income' and also claimed credit of STT, against tax in its home country. Thus, blaming the Finance Minister is also not justified.

Surendra Bhargava

Former Chief Commissioner, Income Tax

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