The Budget may restrict the long-term capital gains tax exemption to only the top 500 listed companies. The feeling is that since several small stocks are subject to price manipulation, investments in these stocks should not be incentivised by extending tax breaks.
Earlier, the government had exempted investments made in the top 500 companies from long-term capital gains tax (for securities acquired during March 2003-March 2004).
But, in the mini-Budget presented in 2004, Finance Minister P Chidambaram had extended this benefit to all securities on grounds that the move would give a boost to the capital markets. Long-term capital gains in mutual funds will, however, continue to get full exemption.
Penny stocks have been the breeding ground for manipulators. The market regulator has passed many orders banning manipulators from dealing in their securities, and in some cases barring them from the capital markets altogether.
In penny stocks, where shares are mostly in a physical form, it is easy for manipulators to change dates of acquisitions of shares and claim exemption showing the gains as long-term capital gains. Investigations have revealed that a lot of black money-conversion has happened through this route and hence this should be plugged.
Besides, since retail investors often give in to the lure of penny stocks because of their low prices, restricting incentives to large and relatively safer companies will serve the cause of investors.
Market experts, however, say that investors should be given the choice of where they want to invest and the tax structure should not favour any particular segment in the market.
Currently, long-term capital gains are nil for transaction chargeable to the securities transaction Tax (STT). Any investment made for a period of more than 12 months is considered long-term.
Short-term capital gains are charged at 10 per cent for all transactions chargeable to the STT, except derivatives.
The STT on delivery-based transactions routed through the stock exchanges is charged at 0.1 per cent on both legs of a transaction. Non-delivery based transaction is charged at 0.02 per cent on one leg.
Sales of derivatives in a stock exchange are subject to 0.0133 per cent tax, while sales of equity oriented mutual funds attract 0.20 per cent.
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