The Hindu Business Line : The Do Re Mi of Ef Bee Tee

Yes, one should think so. Because many of the items which came under the FBT regime attracting a 50 per cent tax as it were are now going to attract only 20 per cent. Telephone bills have come for a harsher relook with the tax being upped from 10 to 20 per cent.

The information technology and pharmaceutical companies have reason to rejoice as they have been let off rather lightly attracting FBT on only 5 per cent of their travel bills. This, the Finance Minister claims, has been done in deference to the fact that these two industries entail lot of travelling on the part of their employees. But this could possibly open the proverbial Pandora's box — hectic lobbying will be done by companies in other sectors to wangle similar concessions from the Finance Minister. We may also witness litigation on this count on the ground that giving special treatment to the two sectors is discriminatory.

Investment vs trading

AS PER the Finance Act 2004, tax under Sec 111A of the I-T Act (w.e.f. April 1, 2005) will be charged at 10 per cent (excluding surcharge and education cess) on the income out of short-term capital assets under the head `capital gains', if the assets being an equity share in company or unit of an equity-oriented fund and Security Transaction Tax (STT) has been paid on the above sale proceeds and such sale has been made after October 1, 2004.

I am a director in a company. My director's remuneration and other income, besides the sale of above short-term capital assets, are approximately Rs 3 lakh. I am doing the purchase and sale of equity shares of the company on a regular basis, say, at least 3-4 times every week. If any profit on such above equity share transaction (short-term basis after October 1, 2004, and on which STT has already been paid) becomes more than Rs 10 lakh whether these transactions being the regular purchase and sale, will be treated as short-term capital assets on which short-term capital gain tax at 10 per cent is payable or may be treated as share trading profit under the head `profit and loss from business'. What is the difference between trading in shares for the purpose of `profit and loss from business' and `short-term capital gain'?

Binod Sharma, e-mail

The line dividing investments and trading is rather thin. Profit from sale of investments is called capital gain. Profit from trading of shares is business profit. Capital gains are of two varieties — short-term and long-term. They are long-term as far as shares are concerned if they have been earned after holding them for more than 12 months. Problem, therefore, arises with reference to short-term capital gains. Are they business profits or short-term capital gains?

The question is not merely rhetorical or pedantic. People itch to get a hitch into the capital gains bandwagon owing to the huge tax concessions it begets. There is no income-tax on long-term capital gains on proceeds that suffer STT. Besides, short-term gains, the proceeds of which suffer STT, are let off with a soft 10 per cent tax. Whereas if you are taxed as a trader, you would have to pay the normal rates of taxes. But then you may end up paying lesser if you succeed in booking expenses the limit for which is set only by one's own ingenuity.

(ASK! Send in your queries to ask@thehindu.co.in)

S. Murlidharan

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