- Wealth PMS (50L+)
The Income Tax department has released a circular which supposedly deals with the “distinction between shares held as investment versus for trading”.
This is to distinguish whether profits from sales of such transactions are treated as capital gains (short term: 10% tax, long term: 0% tax) or as business income (34% tax).
Now you would expect that by such a circular, the I.T. department would have clarified what the conditions are for treating share sales as investments or for trading.
That would be a dream, it seems, because all the tax department has clarified is NOTHING! They have simply stated some court rulings and have maintained that the distinction between the two is entirely subjective and in the complete discretion of tax assessing officers. This is criminally wrong; we should be putting clear cut guidelines on what is trading and what is investment!
So what have they really said? That:
I am convinced that the department has muddied the waters some more. It’s ridiculous that we are going back to a discretionary system instead of simply designating such profits as one or the other based on objective, understandable criteria.
What would I be more happy with? Something that says: If you hold a share for less than three months, this is trading income. If you borrow money on “margin” with a stock broker, this is trading income. If you turn over more than 400% of your capital, this is trading income. (Meaning that if you have 10 lakhs invested, and your buy and sell transactions add up to more than 40 lakhs, you are a trader) And a humble request is to keep it simple.
Will the tax department lose a lot of revenue? Not really – with clarity, more people will invest (or trade) and therefore the net revenue they recover will be higher. Add to that the fact that clarity means lesser number of expensive arbitration and court rulings, computer identifiable trade vs. investor situations and less scope for corruption. Even if it means some people will suffer (will be called “traders” versus “investors”) it’s a way for all of us to rest easy because we know how much tax we have to pay!
Currently, even FIIs are confused:
According to Punit Shah, leader-financial services of PwC, “The uncertainty over the FII tax regime could grow. Our experience is that many FIIs are filing returns as capital gains, paying a 10% tax. The circular has reproduced certain principles laid down by judicial pronouncements which seem to hint FIIs are earning business income rather than capital gains.”
Questions that still remain unanswered:
I hope that further circulars will be more informative.