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Tax experts see CBDT circular on securities lending as let-down
February, 28th 2008
The Central Board of Direct Taxess (CBDT) clarificatory circular on taxation issues under the securities lending scheme has been a let-down for many tax experts, who contend that the department has only reaffirmed the existing provisions in law and not thrown light on the real issues that players such as the foreign institutional investors (FIIs) were looking forward to.

Although the CBDT circular has cleared major doubts on taxation issues relating to the lending and borrowing of securities for settlement of securities that are short sold, some tax experts point out that issues such as the taxability of lending charges received by FIIs need clarity.

They also highlighted that the circular remains silent on whether short selling of shares would be considered as speculative transactions or not.

The CBDT has in a recent circular said that transactions of lending and borrowing are not liable to securities transaction tax (STT).

It has also been clarified that lending/borrowing of securities under the securities lending scheme would not amount to transfer and therefore no capital gains would be levied on the lender.

All this circular does is to confirm the existing provisions in law. It has only reaffirmed the law.

FIIs would still have to do their own analysis and take a call. Even without complete clarity on certain taxation issues, I think they would go ahead and take decisions on short selling of securities, Mr Hiresh Wadhwani, Partner, Direct Tax, Ernst & Young India.

Mr Sunil Gidwani, Executive Director, PricewaterhouseCoopers, also felt that taxability of lending charges received by FIIs need clarity.

He also highlighted that the circular did not address the issue of whether profits made by FIIs from short selling would be treated as capital gains or business income (trading profits).

Clarity required

The tests provided in an earlier CBDT circular for making a distinction between an investor and trader cannot be applied in situations of short selling of securities, Mr Gidwani said.

Ms Behrose Kamdin, Director, KPMG said that clarity was needed on whether short selling of shares was a speculative transaction or not.

As the delivery of shares is given in a short sale transaction by resorting to borrowing, the profit earned on a short sale should not be speculative profits, she said.

Moreover, she said that clarity was needed on whether the cost involved on the borrowing of securities should be deducted /added while computing the capital gains /losses arising from short selling.

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