One problem with lawmakers is that they make laws only to modify them, time and again.

The other side of the coin is that whenever laws are changed, the consequences to every party that is going to be affected are not thoroughly considered.

Of course, the immediate fallout of the changes is obvious (and that is chiefly why the amendment is carried out). However, some consequences are far-reaching and not immediately evident. Consulting a domain expert would be a good way of going about this, however, if wishes were horses…

This piece deals with the Securities Transaction Tax and some operational difficulties therein that market operators are facing. By now all investors must know that the STT is applicable to various transactions at differing rates.

Non-delivery based transactions in equity shares and units of an equity-oriented mutual fund carried out on a recognised stock exchange are charged an STT of 0.015 per cent on sale.

Similarly, transactions in the derivative segment have to bear an STT of 0.01 per cent on sale. These were the initially introduced provisions.

Share brokers and traders made representations to the finance minister and consequently Sec. 88E was amended to bring relief to such traders. In other words, where the total income of an assessee includes business profits arising from securities transactions, he shall be entitled to a rebate from the tax liability arising from such transactions.

To calculate such tax liability, the average rate of income tax payable by the assessee has to be applied on the eligible income.

The rebate is limited to the amount of STT paid or the tax liability, whichever is lower. Also, to claim such a rebate, the assessee has to furnish evidence of payment of STT along with the return of income.

However, for investors, while computing capital gains on sale of securities (shares and units), no deduction is allowed for the STT.

So far so good. However, Mr Vinod Nevatia, a dear friend and stockbroker has pointed out some limitations, which have unfortunately not been addressed.

Mr Nevatia's contention is that an impression was created in the minds of traders that the STT will be like an advance tax, which will be adjusted against their tax liability on income from such transactions and it will not be an additional tax over the full 30 per cent income tax.

However, Sec. 88E as it is worded falls short of the earlier expectations in as much as:

STT can be deducted only from the tax payable on the income from securities transactions. If there is a loss, the STT will only be an additional cost and cannot be carried forward for future set-off or cannot be adjusted against tax on any other income.

Or, if profits are low, the rebate will be only a part of the STT paid on account of the stipulation that such rebate would be limited to the amount of STT paid or the tax liability whichever is lower. Therefore, the STT would be an additional tax over and above the full income tax payable.

Secondly, as per Sec. 88E, the rebate will be only at the average rate of income tax. This "average rate" causes difficulty. An assessee may be a salaried person, an investor and a trader all at one time, or have other businesses.

For example, say Mr Joshi has investments in shares yielding capital gains and he also separately trades in securities through a proprietary business firm.

In such a case, his average rate can be much lower. In absence of any clarifications, all capital gains, long and short term, will be considered to work out the average rate of tax.

There are other issues too. Would the STT be considered a deductible expense or would the taxable income be gross trading income before paying STT?

It will be clear from the example below how badly affected low profitability businesses are. It has to be kept in mind that these businesses are critical to the market in as much as they contribute in lending depth and vibrancy to the market. However, as per Mr Nevatia, these businesses will not be viable any more.

Suppose Mr Joshi, a trader, carries out the traditional badla, which is now called lending of funds. He buys shares worth Rs 100,000 and simultaneously enters into a sale transaction in the futures market.

This trade is reversed after say two weeks. In this process, he earns 9 per cent per annum or simply, Rs 9000x 2/52 = Rs 346 for two weeks.

Thus total tax on the income of Rs 346 works out to Rs 187.90 i.e. 54.31 per cent in the first case and to Rs 211.90 i.e. 61.24 per cent in the second! Surely this cannot be the objective of the finance minister!

Mr Nevatia strongly feels that:

• For the business of trading in securities, the government should not levy any tax in addition to the income tax.
• If indeed levied, STT paid should be made fully (not at average rate) adjustable.
• Also, the STT should be allowed to be carried forward in case of losses or low profits. If at all, it may not be allowed to be adjusted against income tax payable on income other than from securities.

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