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No Transaction Tax For Debt; Lower rates For Day Traders, Derivatives

Rollback, PC Style Our Policy Bureau New Delhi, July 21  The finance minister, P Chidambaram, has given in to the investing community and brokers and cheered the markets by relaxing the provisions of the Securities Transaction Tax (STT) proposed in the Union Budget. The burden of the STT, which will have differential rates for delivery, day-trades and derivatives transactions, also provides for splitting of the tax incidence equally between the buyers and sellers, as against only on the buy side earlier. The other big news is that the new levy will not apply to transactions in debt instruments. This is expected to an immediate pick-up in debt market volumes, which had dried up following the announcement. The minister’s proposed multiple STT rates, provide for the lowest tax of 0.01 per cent for derivatives (futures and options) and highest of 0.15 per cent for delivery-based transactions. Further, those who are paying income tax on business profits will also be allowed to take credit for STT against tax on business income. This is a very big concession as it lowers the day-traders, business’s and broker’s tax burden, actually making it even less taxing than earlier. The mutual fund industry and investors in their schemes too have reason to cheer. The finance minister has levelled the playing field by extending the nil long term capital gains tax and 10 per cent short-term capital gains tax to equity-oriented schemes. Unitholders in these schemes, though, will now need to pay transaction tax. Also it is status quo, as it was pre-budget, for debt funds and where the STT is neither attracted nor exempted, the earlier capital gains tax shall apply. The finance minister announced these changes while replying to the debate on Union Budget in the Lok Sabha on Wednesday. The House later passed the vote-on-account for two months after Mr Chidambaram’s response to the debate which was marred by walkout by the National Democratic Alliance . The minister, however, did not yield to the pressure of the Left parties to restore foreign direct investment (FDI) cap on telecom, insurance and civil aviation. Referring to the controversy surrounding proposal to hike sectoral caps, Mr Chidambaram said, “this is a matter which could be resolved through discussions.” The Budget, the minister said, has laid the foundation for sustaining 7 to 8 per cent growth, which could be achieved only if investment in agriculture was stepped up. Stating that he had not overestimated revenue, Mr Chidambaram said he would collect, “the undisputed tax arrears like a bee drawing honey from flowers. I would like the flower to yield before I sting.”

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