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The Finance Ministry has sought views from market participants on possible changes in the capital gains tax and securities transaction tax (STT) structure.
“This issue was raised during the meeting between the Finance Ministry and market participants on Monday. The Ministry asked them whether the combination of reducing capital gains and increasing STT will be good or not. However, nothing concrete emerged,” a person familiar with the development told Business Line .
Shome panel report
A market participant, who attended the meeting, said this issue emerged during the review of systems for qualified foreign investors (QFIs).
There was a feeling that reduction and even doing away with capital gains tax and increasing STT would bring more clarity in the system, he added.
This development is significant in the light of the Shome Committee’s recommendation. The Committee in its ‘Report on General Anti-Avoidance Rules (GAAR) in Income tax Act, 1961’ suggested that, “the Government should abolish the tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents.”
To make the proposal tax neutral, the Government may consider increasing the rate of STT appropriately, it added.
This meeting, chaired by the Economic Affairs Secretary, Arvind Mayaram, was called mainly to discuss issues concerning FII investment in debt and review of QFIs, besides other issues. It is believed that the meeting also aimed at getting a sense from the markets for the next Budget.
Foreign institutional investors put money in listed securities through portfolio investment routes. At present, trading in these securities attracts STT. This tax was conceptualised as a tracking instrument for investment. However, over the years, it has transformed more into a means for getting revenue.
The participant said that merely increasing STT would not be a good idea as this would strengthen the revenue tag. However, if it is combined by reduction in capital gains tax, it would give a balanced view of market measures, he added. Currently, there is no tax on long-term capital gains (gain on sale of listed securities after holding for more than 12 months). But, short-term capital gains are taxed at the rate of 15 per cent.
According to the Shome Committee, the present revenue from taxation of capital gains from such securities is less than Rs 3,000 crore. However, there would be some revenue foregone on account of non-taxation of short-term capital gains in the case of FIIs, who avail the treaty benefit (mainly India-Mauritius and India-Singapore tax treaties). The Government got Rs 2,914 crore through STT during April-November.
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