Budget Watch | Economy

Lowering transaction cost tops capital market wish list

Broking body lobbies for abolition of dividend distribution tax, STT rebates

With Union Budget 2018 less than two weeks away, capital market participants are hoping for some investor-friendly measures, having already submitted their wish lists to the Centre.

As has been the case in the past few years, rationalisation — if not complete removal — of securities transaction tax (STT) tops the list of demands that includes a few other tax-related measures as well that would not only lower the overall transaction costs for the investors but also strengthen the stock exchange mechanism to avoid any possible misuse through tax loopholes or regulatory arbitrage.

The Centre introduced STT in October 2004 to replace the then-existing long term capital gains (LTCG) tax.

Ever since STT was introduced, there had been regular demands for its removal or at least rationalising the rates to encourage investment rather than speculation.

Further, the manner in which STT was levied on options contracts was changed in 2008, making the tax component quite negligible in such contracts. This led to a huge jump in their volume at a time when the cash market turnover had not grown in a corresponding manner.

Market participants had been demanding an increase in the STT rates in derivatives while lowering them in the cash segment so that the tax component affects speculative trades more in the derivatives segment as compared with investment transactions.

Incidentally, the issue of LTCG tax replacing STT has been raised again by a large section of market participants this year with some even highlighting that the government has lost revenues of more than ₹3 lakh crore by withdrawing LTCG in 2004-05.

‘Tinkering with LTCG’

“Market seriously believes that there would be some tinkering with long term capital gains tax in this year’s budget,” said Arun Kejriwal of Kejriwal Research & Investment Services.

“It could be like increasing the duration from 1 to 2 years to match with gains from property or introducing an intermediate tax slab,” Mr. Kejriwal said.

“This being the last full budget before general elections, relief to the common man is expected as well as some lowering of corporate tax rates as announced a couple of budgets back,” he added.

Interestingly, the BSE, in a letter written in 2015 to the then Joint Secretary of the Ministry of Finance, had made a similar proposal for bringing back LTCG. The issue of tax evasion through stock exchanges by paying a small STT component instead of LTCG tax has been raised regularly by a large section of market participants.

Meanwhile, the Association of National Exchanges Members of India (ANMI), an umbrella body of stock brokers, has demanded the abolition of dividend distribution tax, industry status for the broking business and re-introduction of Section 88E of the Income Tax Act.

Section 88E, which was withdrawn in 2008, allowed entities to claim rebates on the tax liability arising from the gains in securities transactions.

The tax liability could be adjusted against the quantum of STT paid in that particular assessment year.

“The withdrawal of Section 88E and the consequent double taxation completely broke the back of the market and caused a huge fall in volumes,” stated the note by ANMI. The Hindu has reviewed a copy of the memorandum submitted by ANMI to the government.

“Considering that the financial markets are the major provider of risk capital and debt capital, it is important to have conducive tax policies for enabling participation of all stakeholders in the markets,” Mr. Kejriwal added.

The CII has already submitted a detailed representation to the government for consideration in the upcoming Union Budget.

DDT rate

It has proposed to rationalise the dividend distribution tax (DDT) rate to 10% from the current 15%.

It has also said that the government could – if it does not want to lower the DDT rate – tax the dividend paying company on the profit, including the distributed profits at corporate rates to negate the multiple level taxation issues related to dividend.

Dividend should be taxed in the hands of the non-corporate (leveraged) shareholders as normal income, and expenses should be allowed against such dividend in full, according to CII. It also wants the government to give tax pass through status to all categories of Alternative Investment Funds (AIFs).

For mutual fund investors, it wants the holding period for debt mutual fund to be brought on par with that of equity to qualify for LTCG benefits.

For availing LTCG, the current requirement is 36 months for debt units and 12 months for equity.

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Printable version | Feb 27, 2020 6:10:01 PM | https://www.thehindu.com/business/Economy/lowering-transaction-cost-tops-capital-market-wish-list/article22481384.ece

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