Anup Kr Khandelwal
The Union Budget for the financial year 2021-22 is likely to focus on measures for the economy’s recovery from the shocks of the Coronavirus pandemic. Since stock markets are critically important for an economy, a recovery prescription that includes incentivising and encouraging equity investing will catalyse India’s GDP growth in the post-pandemic years. An overarching impact of stock market investing can be ensured by implementing the long-pending reforms in the oncoming Union Budget.
Simplifying classification of income
Currently, there are multiple classifications for income from capital market transactions under the Income Tax Act, namely speculative income, business income, short-term capital gains and long-term capital gains. This creates confusion and fungibility challenges for the participants for profit and loss calculations on different types of trades. For example, intraday cash market trading is classified as speculative income but intraday derivatives trade is classified as business income.
The Indian taxation system is also a departure from the global practice of classifying trading positions as ordinary business income and investment positions as capital gains. No other country has the concept of speculative income, or the system of segregating short-term and long-term holding and taxing them differently. With no flat rate being levied or a uniform system of income classification, taxes on derivatives is one of the highest in the world, which is a significant deterrent for market participation and a roadblock to evolution of an equity culture in India.
The concept of speculative income must be done away with and categories of income from capital market transactions should be limited to business income, long-term capital gainsand short-term capital gains. This will ease the problems of tax payers investing in equities also create opportunities for cash and futures arbitrage.
Reintroduction of rebate under Section 88E
When Securities Transaction Tax (STT) introduced in 2004, it was meant to be in lieu of the long-term capital gains tax(LTCG), which was then exempt on equity investments.
However, recognising the fact that there were categories of market players who treat the income from trading in the market as their business income, a rebate was allowed to such market participations under Section 88E of the Income Tax Act to be claimed while filing their returns against any STT paid to avoid double taxation. This tax treatment was changed from rebate to expenditure in 2008-09. Later, LTCG was also reintroduced in 2019.
The tax rebate must be reintroduced as both STT and LTCG results in high cost-per-trades and thus becomes a disadvantage for investors. Reintroduction of Section 88E will result in increased volumes and therefore much larger collection of STT/CTT. In fact, complete abolition of CTT, which has been a long-standing demand of the market, and exemption to designated market makers from STT will lead to an increase in revenues due to increased participation in markets.
Further, exempting dividend income of up to Rs 10,000 per company for investors of shares, rationalising GST rate applicable for Capital Markets from the current 18% to 12% , making necessary amendments to the Securities and Exchange Board of India Act, 1992 to impose a time limitation upon SEBI for issuance of show cause notices and initiating proceedings and allowing at least 3 months to brokers to submit Form 37BA, which is a declaration form to be submitted to the company paying dividends to their shareholders are some additional measures for consideration of the FM in this Budget.
Anup Kr. Khandelwal is President at ANMI.
