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Tax issues? Iron out the creases

A N Shanbhag | July 17, 2004 14:04 IST

Last time we took a bird's eye view of the various Budget 2004 provisions. This time we shall examine a few issues that have generated enormous debate and consequently doubts in investor's minds.

The 0.15 per cent securities transactions tax (STT)

STT is payable only by the purchaser and not by the seller. It is leviable on the purchase of all securities whether delivery-based or not.

Moreover, STT is payable irrespective of the holding period, i.e., whether the sale results in long- or short-term gain, speculation income or even business income. However, the most important point is that the STT would be applicable only on or after the date specified by the central government.

This means that, as of now, all your purchase and sale transactions continue to be governed by the old regime of capital gains taxation.

Long-term capital gains tax abolished

Simultaneously, any long-term capital gains arising from transfer of securities is exempt as long as such transaction is on a recognised stock exchange on or after the specified date to be notified by the central government.

Note that though the STT is applicable for sale transactions only on or after the specified date, the LTCG exemption amendment is applicable to securities bought before, on or after the specified date but sold only on or after the specified date.

Simultaneously, the short-term capital gains tax has been drastically reduced from a maximum of 33 per cent to 10 per cent.

Commentary

First, it must be realised that these three amendments go hand in hand with each other. STT, LTCG exemption and STCG tax @10 per cent would be either simultaneously applicable or not, depending on whether the Bill is passed.

Secondly, to reiterate the earlier point, these changes are not applicable as of now; they will come into force only after an announcement in the official gazette.

Therefore, if you were to buy shares today, you would not have to pay the transactions tax. Similarly, if you were to sell shares today, the usual rate of long-term or short-term tax would be applicable.

There is some confusion over whether the STT is applicable to debt instruments. As the law stands today, yes, if the debt instruments are securities traded on the stock exchange, the STT would apply. But here too some changes may be made as the MF industry is in the process of making a representation to the FM. 

Mutual funds not included in the new amendments

The wordings of the amendments leave no room for doubt that MF units are out of the purview. You buy MF units from the fund and you redeem them back to the fund. A stock exchange does not come into the picture here.

Secondly, even if you were to buy an unit on the exchange, it is a moot point whether MF units are securities or not. As the law stands today, an MF unit does not come under the ambit of securities and consequently, for unit holders, the old regime of capital gains tax would continue to apply. In other words, MF units would not be affected by all the three changes discussed above.

While on MFs, readers must know by now that the dividend distribution tax (DDT) on debt schemes has been maintained at 12.5 per cent for individuals and HUFs but has been increased to 20 per cent for corporates and other investors.

This has apparently been done to dilute the arbitrage opportunity where corporates would usually pay tax of 35 per cent on their normal income but routing income through the MF would entail a tax of only 12.5 per cent.

In any case, very surprisingly, the 20 per cent DDT has been made applicable from July 9, 2004 onwards, the day after the Budget. Imagine a situation where an MF declares a dividend next week and deducts the enhanced 20 per cent DDT.

In the meanwhile, for some reason, the Bill does not get passed and fails to become the act. What recourse do MFs have in such a scenario?

Gift tax in another form

There is a significant difference between the erstwhile gift tax provisions and the amendments made in the Budget. In short, the earlier donor-based gift tax has partly been reintroduced in the form of a donee-based income-tax.

Sec. 2(24) of the ITA defines income. A new subsection (xiii) has been introduced therein to include any sum of money in excess of Rs 25,000, received by a person in cash or by cheque or draft or any other mode of credit if it is received otherwise than by way of consideration for goods or services.

Only sums received from non-relatives are chargeable to tax. It may be mentioned here that the ITOs have always been empowered to scrutinise the antecedents of the gift, if they feel the need to do so. In short, gifts from relatives have to be consistent with the financial wherewithal of the donor, else these could invite suspicion.

Gifts from non-relatives on the occasion of marriage have been exempted up to a limit of Rs 1 lakh. Similarly, amounts received by way of inheritance or under a will are tax-free. For an employee bonus, gratuity, pension or insurance etc is not included.

Commentary

Several of my readers and clients have enquired whether multiple gifts, each under Rs 25,000, would be exempted. The answer is in the negative, for gifts received in the aggregate have to be considered and not individually.

Secondly, a strict reading of the law seems to suggest that these new provisions are applicable to cash gifts and not to movable and immovable property gifted.

It may be mentioned here that the earlier gift tax was applicable to all kinds of gifts, including immovable property. A clarification on this would be helpful.

Income up to Rs 1 lakh exempt

Anyone with a taxable total income of up to Rs 100,000 (before the Sec. 88, 88B and 88D rebates) will have his income tax liability automatically rebated.

However, for those whose total income is above Rs 1,00,000, the old rates and slabs continue. Here, queries have been raised as to what exactly constitutes total income, i.e. what deductions, exemptions and rebates would be considered and which will be left out.

The term "total income" refers to the amount arrived at upon which tax is finally calculated. Ergo, all deductions (standard deduction, housing loan interest, 80 series etc.), exemptions and set-off of losses have to be considered in order to compute total income. Only rebate u/s 88, 88B and 88C cannot be considered.

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Sub: TDS Rates

What is the TDS rates applicable now for contracts, professional charges, rents, interest on securities, commission and non resident paymnets?


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