The Hindu Business Line : Weighed down by tax in securities transactions

I HAVE purchased and sold some shares. On all transactions of purchase and sale, I am charged a service tax and also a securities transaction tax. The service tax also includes a component towards education cess. The service tax and education cess are charged on the brokerage, charged by the broker while the securities transaction tax is charged on the gross value of purchase and sale of shares. Can the service tax and education cess as also the securities transaction tax charged at the time of sale be claimed as a deduction in computing the capital gains?

Can the service tax and education cess as also the securities transaction tax charged at the time of purchase be added to the cost of acquisition of the shares? Will all capital gains arising on sale of shares through a recognised stock exchange after April 1, 2004, be eligible for exemption from capital gains tax? Will this exemption also be available on the capital gains arising from the sale of bonus shares through a recognised stock exchange on or after April 1, 2004?

V. Arunachalam

Reply

The service tax and education cess charged on the brokerage by the broker at the time of purchase of shares can be added to the cost of acquisition of shares. Similarly, the securities transaction tax charged at the time of purchase of shares can be added to the cost of acquisition of shares. The service tax and education cess charged on the brokerage by the broker at the time of sale of shares will be an expenditure incurred wholly and exclusively in connection with the transfer and therefore can be claimed as a deduction in computing the capital gains.

Similarly, the securities transaction tax charged at the time of sale of shares can be treated as an expenditure incurred wholly and exclusively in connection with the transfer and, thus, can be claimed as a deduction in computing the capital gains.

Section 10(38) allows an exemption in respect of long-term capital gains arising from the transfer of equity shares of a company or units of an equity oriented fund. This exemption is available provided:

The transaction of sale of such equity shares or units is entered into after the coming into force of securities transaction tax; and

Such transaction is chargeable to securities transaction tax.

Section 111A seeks to tax short-term capital gains from the transfer of equity shares of a company or units of an equity-oriented fund at 10 per cent provided the above two conditions are satisfied. Equity-oriented fund for the purpose of these sections means a fund i) where the investible funds are invested in equity shares of a domestic company to the extent of more than 50 per cent of the total proceeds of such fund; and ii) which has been set up under a scheme of a mutual fund specified in Section 10(23D) of the Act.

The percentage of equity shareholding of the fund shall be computed on the basis of the annual average of the monthly averages of the opening and closing figures.

Securities transaction tax has come into force with effect from October 1, 2004. Since securities transaction tax has come into force only with effect from October 1, 2004, the exemption in respect of long-term capital gains will be available only in respect of shares sold on or after this date.

The short-term capital gain arising on the sale of shares on or after this date will be charged to tax at 10 per cent (increased by a surcharge where applicable and additional surcharge). The shares, to get the benefit of the exemption or the lower rate of tax as indicated above, must be sold through a recognised stock exchange. Bonus shares sold on or after October 1, 2004, through a recognised stock exchange will also be entitled to these benefits.

It may be mentioned that if shares are held for more than 12 months, the gain arising on its transfer will be long term or else the gain will be short term. Also, the benefit of adding the service tax, education cess and securities transaction tax to the cost of acquisition or, as the case may be, reducing it from the capital gains will result in no advantage where the gain is long term and where the exemption is available, in any case, no tax is chargeable.

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