Tax-evading retail investors to face higher I-T demand
August, 21st 2006
Nearly six lakh tax payers, whose returns are selected for scrutiny this fiscal, will face the heat from tax authorities if they trade in stocks but mis-declare these as investments. If categorised as a trader, a person has to pay a higher tax.
Assessing officers will apply the parameters to be laid down by the Central Board of Direct Taxes (CBDT) to check if the taxpayer is a trader or an investor only in scrutiny cases, said a senior government official. While domestic tax payers will be impacted, FIIs may not as they file nil returns and their cases are seldom picked up for scrutiny. Scrutiny is the process of some selecting income tax returns and examining them closely by calling for extra information.
The norms for selection of cases for scrutiny have already been finalised for this fiscal. While stock brokers are included in the scrutiny basket, it does not specifically cover other assessees who transact in shares. There may be no separate guidelines for scrutiny of returns for this segment. However, if a return is picked up and contains income from share transactions, then tax authorities will apply the tests to differentiate between shares held as stock-in-trade and those held as investments.
Nevertheless, all tax payers having share transactions may have to consider the implications of CBDTs final instructions, once they are issued, said Samir Gandhi, tax partner, Deloitte Haskins & Sells.
A trader in stocks has to pay a 33% tax on his income categorised as business income. If a person is an investor in listed securities and pays securities transaction tax (STT), profits from sale of shares will be treated as capital gains. He will be exempt from long-term capital gains tax, but has to pay a 10% short-term capital gains tax.
CBDTs draft instructions listed out 15 parameters to check if an assessee is a trader or an investor. The criteria included the scale of activity, ratio of sales to purchases and holding, frequency of transactions, stated objects in the memorandum and articles of association in the case of a corporate assessee etc. The instructions to assessing officers applied to all market participants including domestic and foreign players.
A few stakeholders have made out a case for keeping FIIs out of the purview of this test and to treat them as investors. If the shares held by FIIs are treated as investments, income from sale of shares are exempt from long term capital gains tax. Mauritius-based FIIs do not pay short-term capital gains tax either. However, those routing their investments from other destinations have to pay a 10% short-term capital gains tax.
Of course, if the income is categorised as business income, FIIs which dont have a permanent establishment in India and enjoy the benefit of tax treaties, will not have to pay tax on such income.
The CBDT has also received suggestions to assign weights to different parameters based on their relative importance. Officials said a case-by-case approach will be followed, implying that the decision on whether the assessee is a trader or an investor will hinge of the facts of each case.