Govt may go for marginal hike in T-tax in Budget

NEW DELHI: The government is exploring the possibility of a hike in the 0.15% securities transaction tax on delivery-based equity trades in the coming budget.

The levy is split equally between the buyer and seller. The hike, if any, is unlikely to be a hefty one. Revision in the rates of non-delivery based trades is, however, not being considered.

The thinking is based on some informal feedback from Sebi officials. The government, which is keeping a tab on the trends in STT collections, has been told that there is scope for raising the rate in the delivery segment.

MoF officials, however, were tight-lipped as the budget formulation exercise has only just begun. Any discussion does not necessarily mean a final view has been taken.

The original proposal to introduce a turnover tax had come from global FIIs, ahead of the ‘04-05 budget. These FIIs are now open to paying a higher STT rate on delivery-based trades, though they want an abolition of the short-term capital gains tax.

Wherever STT is paid, short-term capital gains are taxed at 10%. Long-term capital gains are, however, exempt from tax. FIIs have hailed this as one of the best turnover tax regimes emerging in Asia.

“Payment of short-term capital gains tax involves a great deal of paper work, like submission of documents to custodians. STT, however, is collected by the exchanges at the time when the trades are executed and investors do not need to bother about these payments. We are willing to cough up more tax if our paperwork and compliances get reduced,� said a source at a top American FII.

This issue is expected to be brought to the notice of the finance ministry during pre-budget consultations.

The review exercise is limited to delivery-based equity trades as non-delivery trades operate on thin margins. Day traders and arbitrageurs had raised a hue and cry at the time of the introduction of the levy last year, saying that the originally-proposed uniform 0.15% rate will wipe out their earnings. Taking note of these views, the government imposed differential rates for separate segments.

Despite the phenomenal rise in the sensex over the last couple of months, trading volumes in the delivery segment have not grown much. In this fiscal, the finance ministry anticipates collections aggregating less than Rs 1,000 crore from the new levy across all market segments. Stock exchanges have been collecting STT since October ‘04.

Day traders paying STT can set off the levy against tax paid on business income arising from share transactions. A set-off is, however, not available against business losses. The objective of keeping track of business profits declared on share transactions is to ensure that correct profits are declared.

This would give the government an idea of the magnitude of trades by individual investors. It also provides the tax information network (TIN) with enough data on the identity of potential taxpayers. Those who do not report their income would also pay some tax and would enter the tax data base.