Date:12/07/2004 URL: http://www.thehindubusinessline.com/2004/07/12/stories/2004071200270900.htm

Back Turnover tax debate

Arun Kejriwal

THE maiden Budget of the UPA Government has kicked off a controversy by levying a new tax. This is the Turnover Tax to be levied on securities transactions. The tax to be levied on all purchases or buyers is to the extent of 15 basis points or Rs 150 per lakh.

There is much hue and cry because the tax could affect volumes and kill the intra-day plays and certain types of trading in the capital and debt market.

The crux of the issue is the acceptance of the Government and the Income-Tax Department that possibly there is tax avoidance or tax compliance and hence the urge or necessity for such a levy.

It also at the same time wants to give credit to the honest tax-payer and the patient investor by abolishing Long-Term Capital Gains and reducing Short-Term Capital Gains. It appears that the Government is prepared to take a risk with the broking community as it is diverting attention away from the main Budget to this contentious issue.

Are there any counter suggestions or alternatives? I believe yes and accordingly would recommend the following:

The turnover tax is being levied in lieu of the long-term capital gains tax, which is now being replaced and the short-term trading tax that stands reduced to 10 per cent against 30 per cent. The investor has being given the benefit and is therefore not only happy but also relieved at the reduced paper-work.

Derivatives dealing is not mere trading. It involves higher skill-sets, is a fully regulated market with adequate safeguards and more than enough margins. This segment also pays tax at the highest rate. If the Turnover Tax is payable by this segment, then like the one above even the income here should be taxed at the new short-term rate of 10 per cent.

The turnover tax is being introduced in replacement or in lieu of Long term and short term capital gains tax.

There is every likelihood of a review of this tax in subsequent years. It should be very clear during such a review that the replacement tax must remain as one and if the rates of tax on turnover go up, the short-term tax rate should also be accordingly reduced or removed.

The turnover tax rate applicable should be something which the business can or will afford without it making it unviable.

Keeping this in mind I believe a small tax of between 3 and 5 basis points would be appropriate if charged on buyers in the cash and derivative segment and all income in the short term be taxed at 10 per cent.

I believe that this would be a fair proposition and a review period of 19 months which would include the current half year and the next full year be kept before assessing the efficacy of this system.

(The author is Director, KRIS, a Mumbai-based investment advisory.)