BSE pitches for long-term capital gains tax to check manipulation

Tanya Thomas Mumbai | Updated on January 24, 2018

Ashish Chauhan

The BSE has written to the Ministry of Finance suggesting that long-term capital gains on stocks must be taxed to avoid the stock markets being used as a tax avoidance route.

In June, capital markets regulator SEBI had barred 239 individuals and entities from accessing the securities market for using the BSE’s SME platform to launder money and avoid taxes.

The regulator came down on four companies listed on the SME platform — Esteem Bio Organic Food Processing, Eco Friendly Food Processing Park, Channel Nine Entertainment and HPC Biosciences — when it noticed a sharp rise in the stocks’ prices even as the companies’ profits and earnings per share declined.

Between January 1, 2013, and December 31, 2014, the share prices of Eco shot up by a whopping 6,265 per cent, Esteem by 3,150 per cent, CNE by 2,882 per cent, and HPC by 1,782 per cent.

Making use of norm

According to SEBI’s order, the companies made preferential allotment to certain entities to raise funds, sometimes to benami entities close to the promoters of the companies, and the stock prices were manipulated. Since capital gains from stocks held for over 12 months are not taxable, once the one-year period was over, these entities sold their stocks at higher prices.

In its letter to the Ministry, the BSE said the reason for such an event to have occurred was because of the tax arbitrage made possible by the exemption from long-term capital gains enjoyed by listed securities. Speaking to journalists at an event marking the listing of the 100th company on the BSE’s SME platform, Ashish Chauhan, MD and CEO of the bourse, said such manipulative trades can never be identified by an exchange in real-time. “We can only identify them post-facto. So, this problem can only be solved by plugging the tax loophole on long-term capital gains on listed securities.”

Published on July 16, 2015

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