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Portfolio management profits to be taxed at 10%
July, 19th 2006
This would be music to Portfolio Management Service (PMS) providers. Profits generated by portfolio management will be treated as investment income, and attract short term capital gains tax at the rate of 10%.

PMS profits will not be treated as business income, which would attract the applicable marginal rate of income tax. Around Rs 7,000 crore is churned annually by the PMS market.

The breather is expected as a part of the formal guidelines to be issued by the Central Board of Direct Taxes (CBDT) to its field formations on whether a person is a trader in stocks or an investor in stocks, soon.

Revenue department officials thought there was no reason to classify investors in PMS as traders, senior officials told ET. The income tax department had sought suggestions from the general public in May this year, to decide who should be treated as a trader in stocks and who should be treated as an investor.

The consultation had run into controversy immediately, as there was a presumption that foreign institutional investors (FIIs) too could be treated by assessing officers as traders in stocks, instead of investors, who are liable to pay only the 10% short term capital gains tax. Finance minister P Chidambaram subsequently clarified that there was no such move on FIIs.

CBDT has received numerous suggestions on the proposal, including the one to keep senior citizens dabbling in stock trading out of the proposed tax net. The PMS managers churn portfolio as per the price targets given by their clients. They, therefore, enter or exit scrips, when the price levels indicated by the clients are reached.

This is a different strategy from that of mutual funds, where the investments in the market are made by the investment managers. The clients essentially do not have any say on investment matters.

Despite the frequent churning of the portfolios, under these managers, the I-T department feels that since these are transactions carried out on behalf of clients, who are investors and not traders, only short-term capital gains should apply.
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