Short selling to institutional investors will not attract securities transaction tax, the Central Board of Direct Taxes has clarified in a circular. The board has also said lending of securities under the Securities Lending and Borrowing scheme would not constitute a transfer. So the lender of the securities will not be liable to pay capital gains tax on the activity.
The income arising out of short selling to both the lender and the borrower will be taxed based on their account books as income, the department has said.
The clarification is expected to operationalise short selling by institutional investors in the domestic bourses, which has missed its February 1 deadline. The Securities and Exchange Board of India (Sebi) had cleared short selling by institutional investors some time back and the Reserve Bank of India also approved it in recently, along with the Securities Lending & Borrowing (SLB) scheme, which was prevalent in 1996-97.
CBDT's assistance was sought as there was some confusion on whether short-sold transactions will be settled by the SLB system operated through stock exchanges.
Finance minister P Chidambaram had announced introduction of short selling in the 2007 Budget.