Tax on equity and commodity markets could be the Finance Ministry’s horns of dilemma in the upcoming Union Budget. Key exchanges and market infrastructure institutions have given diverse views to the government on the issue.

“A large institution, which is a key stock market player, has told the government that abolition of short-term capital gains tax (STCG) on equity trading could be the key to bringing back trading volumes that India lost to offshore destinations. This is in contrast to recommendation given by an exchange to not only retain STCG but also impose long-term capital gains (LTCG) tax as that could boost government revenues significantly,” said a source close to the Finance Ministry. The sources declined to reveal which institutions have proposed abolition of the tax.

There is currently a 15 per cent STCG tax on profit from shares sold within one year of its purchase. Profit from shares held for over a year falls under LTCG, which is exempt since 2005. While LTCG is paid by equity traders in most countries, they are averse to pay the same in India due to other statutory levies, market experts say.

Issues in GIFT City

“The exchanges, however, are unanimous in asking for removal of STCG on the GIFT City platform. Currently, only those traders having a base in GIFT City’s certain area are exempt from any kind of tax. If a fund wants to trade from Singapore or Mauritius or any country, a 15 per cent STCG and other levies are imposed on it.

“The institution in its presentation has told the government that such measures make GIFT city an unattractive preposition,” the source added.

Further, the argument given by the institution is that STGC was not giving any significant revenues to the government but adding to the burden of tax collection.

The institution has said that securities transaction tax (STT) is the most appropriate way to collect tax without too many hassles. Removal of STCG and not bringing LTCG could boost volumes by leaps and bounds giving the government windfall gains in STT, is a key argument made by the large player, the sources said.

But a counter argument to this is that foreign portfolio investors coming via treaty countries are already exempt from STCG on derivative trades, the segment which has a the largest share in equity markets.

P-Note ban effect

A clampdown by India on use of participatory notes, a sort of proxy instrument used by those who do not want to bring money into the country, combined with a stringent tax regime has pushed trading volumes to offshore destinations, such as Singapore and Dubai.

These offshore venues have adopted a lax attitude towards hot money flow and tax on financial trading instruments, making exchanges in India vulnerable to any further strict measures by the government, experts say.

Meanwhile, commodity market institutions have asked for a rebate on commodity transactions tax under Section 88E of the Income Tax Act.

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