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Budget '04 -- latest changes

A N Shanbhag | July 24, 2004

Today we shall browse through some of the important proposals affecting the individual investor as well as the latest changes carried out to Securities Transaction Tax and related issues.

STT latest amendments
The changes in the turnover tax are being carried out as I write this. As per the new provisions, delivery-based transactions will continue to attract the levy of 0.15 per cent. But the good news is that the burden of the tax will be split equally between the buyer and the seller. Now, the buyer and the seller will each bear 0.075 per cent.

Day traders, who were the most upset with the new levy, will now have to pay only 1.5 basis points, or 0.015 per cent as STT. In their case, there is no question of capital gains as any gains or losses will take the form of business income/loss.

Moreover, for such day traders, the STT paid can be adjusted against the final tax payable. So in effect, they don't bear any STT at all. However, those who don't report their income would have to pay tax and also be included in the database.

For the F&O segment, the tax will be only 1 basis point, or 0.01 per cent. All debt market deals have been completely exempted from the tax. And most importantly, equity mutual funds will come under the ambit of STT, which means buying units of mutual funds will attract a transaction tax of 0.15 per cent -- the same as equities.

Likewise, such units would be exempted from long-term capital gains tax and would attract short-term tax of 10 per cent. Units of income schemes continue under the old regime of capital gains taxation.

A question arises whether the imposition of this STT system on equity based MFs would lead to double taxation. For, if the STT is indeed to be shared, then the MF's share of the STT would in any case be charged to the scheme which means that eventually it is the unit holders who bear it.

So it is they who pay the tax at either end, the MF scheme being merely in the nature of a conduit. Clarification regarding this issue would be needed.

One caveat. The changes mentioned above are being reported without having fully digested the fine print.

Dividend and bonus stripping

Present : This is related to buying securities or units within a period of three months before the record date of dividend and selling within three months.

Though the income is exempt, the loss arising to the taxpayer to the extent it does not exceed the income has to be ignored for computing the income. Following conditions have got to be cumulatively applicable for Section 94(7) to be operational --

  • The purchase has to be within three months before the record date for dividends.
  • The sale has to be within three months after the record date for dividends.
  • The dividend has to be tax-free.

Proposed:

  • The period of three months after the record date has been extended to nine months.
  • The loss on sale of original units where bonus units have been issued, will be ignored. The amount of such loss shall be considered as the cost of acquisition of the bonus units.

Note that:

  • This is related only with MFs and not securities.
  • The provision becomes applicable, irrespective of the holding period of the bonus units, nine months or otherwise.
  • The loss is not ignored but taken as the cost of acquisition of the bonus units.
  • These changes are applicable for FY 04-05.

Comments: This is indeed very unkind to the MF industry. Surely, the schemes declaring daily dividends will take the worst beating.

Evidently, these provisions become inapplicable if units are purchased, say 3 months and 1 day in advance of the record date.  So all those MFs who still want to aid investors with dividend stripping just have to begin declaring their record date more than 3 months in advance. This date also needs to be extended to resolve the issue once and for all.

Exemption to open-ended equity-oriented MFs

Proposed: U/s 115R(2) no distribution tax was to be levied in respect of any income distributed to unit holders of open-ended equity oriented funds for a period of one year commencing from April 1, 2003. This exemption will continue without any time limit.

Comments: This is Applicable retrospectively from April 1, 2004. This is the one and only redeeming feature for MFs in the Budget.

Capital gains on agricultural land

Present: Capital gains arising from transfer of agricultural land of an individual or HUF situated within specified limits are chargeable to tax. Same is the situation where the land is compulsorily acquired under any law or where enhanced compensation or consideration is received by the assessee.

Proposed: The new Section 10(37) exempts capital gains arising out of compensation or enhanced compensation received on compulsory acquisition of agricultural land situated within specified limits, under any law or the consideration for which is determined or approved by the central  government or RBI.

Such land should have been used for agricultural purposes by the HUF or individual or a parent of his during the period of two years immediately preceding the date of transfer.

No TDS shall be applied where the immovable property is agricultural land whether situated within Muncipal limits or not and where the compensation paid is less than Rs 1 lakh.

Comments: Applicable from FY 04-05. Yes, this is certainly a friendly measure to mitigate the hardships caused. However,  it is submitted that the same concession should have been extended to such lands sold or transferred without compulsory acquisition. This would have got rid of a lot of litigation arising out of whether the land is agricultural or not and within the specified limit or not.

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