DAY TRIPPING IS HARD NOW
Saturday, 1st March, 2008
Finance Minister P. CHIDAMBARAM may not have changed rates for securities transaction tax (SIT), but his proposal to treat SIT 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 SIT amount to the total income, induding 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 SIT at the end of the year. However, this benefit of setting off income tax against SIT would not be available once the new proposal comes into effect.
What will be the SIT 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 Rs 20 SIT, 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 SIT 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 SIT deduction not treated as expenses.
Currently, SIT is charged at the rate of 0.125% on delivery-based buy-and-sell transactions and 0.025% only on non-delivery based 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 P&O segment by changing the methodology of SIT calculation on option contracts. At present, option contracts attract an SIT on the entire notional value of the contract. This is going to change after the Budget proposals come into effect, as SIT will be charged only on the premium of an option contract.
The FM’s proposal to withdraw the rebate, allowed under Section SSE, means profit earned by day traders and jobbers would attract income tax at normal rates, in addition to SIT. This has been a big blow to these players whose income is chargeable under the head ‘profits and gains from business and profession’. 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. However, some market savvy investors have been taking advantage of loopholes in the SIT law to avoid paying legitimate tax on business income from speculative stock trades.
These investors “purchase” SIT for a “fee” from other brokers/ traders who will not be able to claim income-tax rebate on SIT 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 SIT has actually been paid to the government.
