Tax booster needed to spur bond trading

The Finance Ministry could give a boost to trading in corporate bonds in stock exchanges if it were to change the taxation policy for such transactions, Ashish Chauhan, Managing Director and Chief Executive Officer of BSE, has said.

There will be more liquidity in corporate bonds on stock exchange platforms if the tax treatment were to be tweaked so as to levy securities transaction tax (STT) on all bond trades put through the bourses, Chauhan told Business Line here.

Once STT is levied on corporate bond transactions, then the long-term capital gains that may arise to investors holding these bonds for more than one year should be tax-exempt, he said.

This will bring more investors into the exchange-traded corporate bond market, Chauhan said.

Currently, the treatment of long-term capital gains exemption is available only for equity trades (including equity-oriented mutual funds) put through stock exchanges.

Long term in the case of equities refers to a holding period of 12 months, according to the current income tax law.

STT was introduced by Finance Act 2004.

Currently, trades on corporate bonds put through stock exchanges do not attract STT and, therefore, no long-term capital gains tax exemption is available, say tax experts. The Finance Ministry has mandated that every equity trade put through stock exchanges will attract STT and different rates have been specified for various types of transactions, such as delivery, futures, options, etc.

As on date, the buyer as well as the seller has to pay STT on cash market trades. In exchange-traded derivative contracts, only the seller pays STT. As part of its pre-budget submission to the Finance Ministry, BSE — Asia’s oldest stock exchange — has suggested that the STT imposed on delivery-based transactions should be the lowest as compared to derivative trades. Only then will real investments (cash market) be encouraged in India, Chauhan said.

Commenting on the BSE suggestion, Aseem Chawla, Partner, MPC Legal, a law firm, said that the suggestion stems from the initiative to boost financial savings in order to give a fillip to the capital markets. “Tax concessions can be possible within the existing enactment,” Chawla said.