Sucheta Dalal :Investor or Trader? That is the question
Sucheta Dalal

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Investor or Trader? That is the question  

Jun 5, 2006



Whether it is the lack of clarity on long-term and short-term capital gains tax, the threat to impose a service tax on exit and entry loads of mutual funds, the demand for explanation of legitimate spending by credit card holders or the new, not-so-saral self-assessment form for salaried individuals or even the Fringe Benefit Tax—there is a clear trend to put more power into the hands of tax officials by making the estimation of tax liability more subjective.

 

Check with any taxpayer and this only suggests increased harassment of genuine tax payers, while there is no serious attempt to catch rampant and brazen tax evasion by those who are probably in a numerical majority in most income segments.

 

But let us focus on the issue that rocked the capital market in the last couple of weeks, namely the big gap in long-term and short-term tax liability based on very subjective criteria of classifying individual investors or traders.

 

The Finance Minister has clarified that situation for Foreign Institutional Investors (FIIs) and domestic mutual funds are also exempt—that leaves only the domestic individual and corporate investors worried.

 

A draft notification put out by the Tax Authority lays down a long list of criteria and judgements that will apparently decide whether what extent of a person’s transactions are classified at investments (where long-term capital gains tax is zero if the shares are sold after a year and short-term capital gains tax is just 10%) and what is classified as trading activity attracting the highest tax rate of over 35%. Since there is a lot of ambiguity about the classification, the entire exercise will be highly subjective.

 

We need to go back to the Finance Minister’s budget speech of 2004-05 to understand why this has caused so much anguish among investors. He said, ‘‘Capital gains tax is another vexed issue. When applied to capital market transactions, the issue becomes more complex. Questions have been raised about the definitions of long-term and short-term, and the differential tax treatment meted to the two kinds of gains. There are no easy answers, but I have decided to make a beginning by revamping taxes on securities transactions. Our founding fathers had wisely included entry90 in the Union List in the Seventh Schedule of the Constitution of India. Taking a cue from that entry, I propose to abolish the tax on long-term capital gains from securities transactions altogether. Instead, I propose to levy a small tax on transactions in securities on stock exchanges. The rate will be 0.15 per cent of the value of security. Thus, a transaction involving securities valued at, say, Rs 100,000 will now bear a small tax of Rs 150. The tax will be levied on the buyer. In the case of short-term capital gains from securities, I propose to reduce the rate of tax to a flat rate of 10 per cent. My calculation shows that the new tax regime will be a win-win situation for all concerned’’.

 

The STT was then reduced drastically after a public outcry and has been hiked again in the recent budget. And investors really believed they had a ‘win-win’ situation until the assessments process is set to begin.

 

Yet, the Finance Minister is unwilling to clarify the situation. Doesn’t this mean that STT is a win-win situation only for the Finance Minister, because it allowed him to collect a new tax by letting people believe they were getting some nebulous concessions?

 

The CBDT’s draft circular had invited public comment until May 25 and I know that scores of tax experts, individuals and legal experts have written detailed letters explaining that an individual or a company has a fundamental right to be both an investor or a trader and it is possible to distinguish between the two categories using objective criteria, instead of the subjective judgement of assessing officers.

 

As one reader points out, ‘‘The different rate of Securities Transaction Tax (STT) on Delivery v/s Non-delivery transactions itself differentiates between an Investor and a Trader’’.

 

Experts have provided more elaborate criteria for determining this—especially for companies. How does the distinction really affect individual investors?

 

This letter from a senior citizen who does not want to be identified explains the situation. ‘‘I am a retired senior citizen—a long-term investor who has invested in equities for 50 years. All my savings are in stocks and I do not trade but hold them as investments. Naturally one books profit when prices reach sky high and not related to fundamentals. Mostly long term but also short term (profits). There is hardly any other source of income and thus percentage of profit from market is high; in addition there are a sizeable number of transactions. Examining the 15 parameters there is no doubt that the tax officer will term me a trader despite the fact that I have never traded in futures. I have never had a CA and filed my tax returns personally, but now will have to find one (a Chartered Accountant) to fight the system. When LTG was taxed I availed of indexation and paid nominal tax which has been replaced by STT. Now as business income I have to pay 33.6% tax without indexation plus STT’’.

 

Professional women who have quit jobs to look after their children and earn additional income by investing in the market (not merely trading) could now be made to pay tax at the highest rates. What is worse, the tax authorities say that even old cases can be re-examined.

 

How can any system be considered fair, when there is no clarity about the taxes paid? Does the government seriously want to pretend that it has no idea how non-salaried tax payers are so often harassed with regard to minutiae in their tax returns? Is it any surprise then that a majority of Indians simply do not pay direct taxes and get away with it too?

 

suchetadalal@yahoo.com

 

http://www.indianexpress.com/story/5769._.html

 


-- Sucheta Dalal



 



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