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Short-term cap gains tax go up to 15%
February, 06th 2007

The finance ministry has not taken a final view on this, but the short-term capital gains tax on stocks could go up, to 15% or even more. Most FIIs would be unaffected by any such move, but it would increase the tax incidence on the income that domestic investors derive from the capital market.

The revenue department is unhappy with the tendency of domestic share traders to misdeclare themselves as investors and lower their tax liability. Traders in stocks have to pay a 33.66% tax on their business income, while investors in stocks pay a 10% tax on short-term capital gains.

Capital gains, the difference between the purchase and sale prices of a stock, is treated as short-term if the stock is sold within one year from the date of its purchase.

If the stock is held for more than a year before sale, the price appreciation is treated as long-term capital gain. When he introduced the securities transactions tax (STT) in 2004-05, finance minister P Chidambaram brought long-term capital gains tax to zero on transactions that attracted STT.

One of the options being looked at is to raise the tax rate on short-term capital gains from 10% to 15%. The other option is to have a graded short-term capital gains tax regime. In the second case, the tax rate will vary according to the frequency in portfolio churning or to how long a stock is held.

If a stock is held for almost a year before being sold, the rate of tax applicable could be close to zero and if the stock is sold immediately after being purchased, the rate could be close to the normal rate for business income. This may, however, be complex to administer.

The proposal is market sensitive and opinion is divided within the finance ministry. A final view has not yet been taken, said a government source.

The revenue department, on its part, wants to plug misuse of the concessional short-term capital gains tax regime. But a section of the finance ministry reckons that the pros and cons need to be weighed carefully as a rate hike could signal flip-flop in policy making. It would also run contrary to the governments goal of moderation in tax rates.

The beneficial capital gains tax regime on shares was introduced in the 2004-05 Budget, when the government imposed the securities transaction tax (STT). An investor has to pay a 10% short-term capital gains tax if the shares are held as an investment and off-loaded within a year. If the shares are sold after a year, the investor does not have to pay any tax on long term capital gains.

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