Query

The Finance Bill, 2004 proposes to levy a transaction tax in respect of transactions in securities if the sale is through a recognised stock exchange; long-term capital gains on sale of securities has been exempt from tax and short-term capital gains will be taxed at 10 per cent. If I am to buy a share and take delivery, and sell it the next day or immediately thereafter and pay this tax, will the income be treated as business income or capital gains?

V. Rangan

Reply

The assessing officer (AO) would not be required to treat the income from a transaction on which the security transaction tax has been paid as capital gains. He could independently examine the transaction, and if the transaction is in the nature of business carried on by the assessee, the AO can assess the income earned under the head "profits and gains of business or profession." Securities transaction tax will be levied even on transactions which are in the nature of business and where the income is in the nature of business income.

We provide a summary of the proposed changes to the taxation of securities transactions. The pre-requisites are:

Long-term capital gains: They would be exempt from tax for securities' transactions that fulfil the above-mentioned requirements.

Short-term capital gains: Transactions that fulfil the prescribed conditions will attract a tax of 10 per cent.

Individuals and HUFs can set off the un-exhausted portion of the basic exemption available to them against such short-term capital gains and pay tax at 10 per cent only on the balance.

Deductions under Chapter VI-A and rebates can be claimed against such short-term capital gains.

Transactions resulting in short-term capital gains will also be liable for a transaction tax of 0.15 per cent.

Security transaction tax: This will be chargeable on the value of taxable security transactions.

The rate was initially fixed at 0.15 per cent of the value of the transaction; it has been subsequently revised with lower rates for transaction in select securities.

The revised rates announced by the Finance Minister are:

In respect of capital gains (both short term and long term) subject to fulfilling the above conditions at 0.15 per cent of the value of transactions to be shared equally between the buyer and the seller.

For equity-oriented mutual funds, transaction tax will be payable at 0.15 per cent.

For day traders, the rate would be 0.015 per cent; this will be available as a credit against tax on business income.

For futures and options, the rate would be 0.01 per cent; this will be available as a credit against tax on business income.

The transaction tax will not apply to bonds and mutual funds other than equity-oriented funds.

For securities which are exempt from this levy, tax will be levied at the normal rates that are applicable now.

The value of taxable security transactions will be:

Query

I am working as a senior scientist at the Central Food Technological Research Institute, Mysore. I am given an allowance of Rs 5,000 per annum for paying professional societies and improving professional knowledge in my area of work. My employer is of the view that this is not exempt under Section 10(14). Is this correct?

K. Udaya Sankar

Reply

Any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions will be fully exempt.

The allowance paid to you does not appear to fall in the specified categories; it appears that your employer's view that the amount will not be exempt is correct.

Mail your queries to taxtalk@thehindu.co.in or by post to Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002.

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