Proposal to be taken up soon; to yield Rs 5,000 crore

Finance ministry considers tax on share transactions

Santosh Tiwary

New Delhi, Nov 4: In a significant move with implications for the stock market, the finance ministry is considering a proposal to tax all share transactions.

The proposed tax, to be called “share transaction tax,” is estimated to yield up to Rs 5,000 crore in a financial year.

The proposal, which sources said would bring transparency in the stock market operations, besides additional revenue to the tax kitty, is likely to be considered by the government during the budget-making exercise for 2002-03, which is set to begin shortly.

According to the proposal, the “share transaction tax” would be collected as tax deducted at source (TDS). There will be two slabs of the new tax — one for those dealing in shares and the other for investors selling shares directly.

The dealers will have to submit TDS at the rate of 0.25 per cent for every transaction. Sources said that as the dealers’ income constitutes normal business income, they will be able to claim deduction of the TDS paid while filing their tax returns for the financial year.

In the case of the investors selling shares directly, TDS will have to be submitted at the rate of 0.1 per cent. As the income of individual investors from this source would constitute capital gains, they will be allowed to claim deduction of the TDS paid while filing their capital gains tax return.

Sources said that despite a 10-per cent tax on capital gains at present on share deals, the government was not receiving any substantial capital gains tax from this mode as investors were managing to show lesser capital gains at the end of the financial year by including fake losses in their returns.

Similarly, dealers too were not showing actual income currently, they added. Imposition of “share transaction tax” in the form of TDS would remove this discrepancy to a large extent and it would be possible for the government to track the defaulters and also the black money involved in these transactions, said sources.

According to them, the ministry’s calculation of an additional resource mobilisation of Rs 5,000 crore through the new tax on share transactions was based on the premise that the total transaction of shares in a financial year was around Rs 10 lakh crore.

They pointed out that the government may be encouraged to impose “share transaction tax” from the next financial year as the current economic slowdown requires additional expenditure and hence additional resource mobilisation.

Sources, however, added that there was apprehension in the government that imposition of this tax would affect market sentiments. They, however, added that the stock market crash after the current year’s budget, which received ten out of ten from industry quarters, was indicative of the fact that the market had its own mechanics and such apprehensions were unfounded.

According to them, with finance minister Yashwant Sinha already indicating that he will carry forward the tax reform agenda in the budget for 2002-03, the chances of this proposal getting a green signal from the government was high.