NEW STT TREATMENT LIKELY TO AFFECT SHORT-TERM TRADING
FINANCE MINISTER P CHIDAMBARAM may not have changed rates for securities transaction tax (STT), but his proposal to treat STT as deductible expenditure has not gone down well with the trading community. Day traders fear that it will put further pressure on their already wafer-thin margins. However, some feel that the new tax treatment may reduce short-term trading and encourage people to take long calls.
According to tax professionals, the current practice adopted by big operators and day traders is to add the STT amount to the total income, including income from trading activity and other income, and subsequently, work out the payable tax. Under Section 88E, they are entitled to get tax rebate and can pay only the surplus of total tax over STT at the end of the year. However, this benefit of setting off income tax against STT would not be available once the new proposal comes into effect.
What will be the STT impact? Say, if a day trader earns a profit of Rs 300 on a total income of Rs 1,000 (expenses of Rs 700), he pays 33% tax of around Rs 100. Assuming a Rs 20 STT, the total tax liability will be Rs 80 based on the current calculation. According to the new proposal, on the same income, expenses will now be considered as Rs 720, instead of Rs 700, as STT will be considered as an expense. So, the profit will be Rs 280, on which the trader has to pay a tax of Rs 92, Rs 12 higher than what he would have paid had the STT deduction not treated as expenses.
Currently, STT is charged at the rate of 0.125% on delivery-based buy-and-sell transactions and 0.025% only on non-deliverybased sale transactions. The rate is 0.017% on F&O sale transactions. The FM has decided to keep these rates unchanged. He, however, has given a boost to traders in F&O segment by changing the methodology of STT calculation on option contracts. At present, option contracts attract an STT on the entire notional value of the contract. This is going to change after the Budget proposals come into effect, as STT will be charged only on the premium of an option contract.
According to BR Bagri of BLB, a Delhi-based leading arbitrageur and jobber, the FM’s proposal to withdraw the rebate, allowed under Section 88E, means profit earned by day traders and jobbers would attract income tax at normal rates, in addition to STT. “This has been a big blow to these players whose income is chargeable under the head ‘profits and gains from business and profession’,” he said.
Another proposal which may worry the trading, broking and investing community is the FM’s decision to bring services provided by stock exchanges and clearing houses under the service tax net. However, some brokers do not think that it will have a major impact on cost. “Brokers who are already paying service tax will not be affected as they can claim rebate. But services like listing and data dissemination may become a little costlier for companies availing of them,” said Churiwala Securities director Alok Churiwala.
However, some market savvy investors have been taking advantage of loopholes in the STT law to avoid paying legitimate tax on business income from speculative stock trades. These investors “purchase” STT for a “fee” from other brokers/ traders who will not be able to claim income-tax rebate on STT beyond a point. Tax authorities are aware of this practice, but find it difficult to nail down offenders as all the transactions are legal and STT has actually been paid to the government.