Reduction in Capital Gains Taxes!

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Good News for Traders & Investors who pay tax!

Changes likely in tax on stock market profits

Budget May Remove Exemption, Merge Long, Short-Term Rates

By Abheek Barman & Priya Ranjan Dash/TNN

New Delhi: When finance minister Palaniappan Chidambaram presents his budget in the first week of July, he could slash the rate at which your stock market profits are taxed.

Today, if you sell stock and make a profit within one year of buying it, you have to pay 30% of your gains to the exchequer. But if you sell after 365 days of buying the stock, you have to pay only 10%. The July budget might scrap differential levies and combine them into a single rate of 10% or 15%.

In 2003-04, then finance minister Jaswant Singh had exempted long-term investments in blue chip stocks (the BSE 500 shares) from capital gains tax for one year, when it was to be reviewed. The review hasnt taken place. In the interim budget on February 3, however, Singh declared that it is the conviction of the government that the regime of listed equities acquired on or after March 1, 2003 being exempt from long-term

capital gains tax should be extended for a further period of three years, so as to provide stability.

If Chidambaram merges short and long-term rates, he might let the tax break for BSE 500 shares lapse.

EQUITABLE GAINS

t Current distinction between gains from stocks bought less than a year ago (shortterm) and those bought earlier (long-term) may be abolished t All capital gains to be taxed at uniform rate, between 10% and 15% t This will benefit 90% of market trades which now pay 30% capital gains tax t Long-term capital gains exemption for blue chips might lapse Low, flat tax on share profits likely By Abheek Barman & Priya Ranjan Dash TIMES NEWS NETWORK

New Delhi: If finance minister P Chidambaram merges short and long-term rates, all investors will end up paying a low, flat rate on equity profits, with no exemptions or time constraints. The new Manmohan Singh government feels that FIIs are bullish on India, but domestic institutions and brokerages are selling short in anticipation of a post-budget boom. The real gainers from todays low prices are promoters, who are consolidating their holdings on the cheap.

Different rates on short- and long-term trades were supposed to encourage investors to buy and hold shares for at least one year, but things havent turned out that way. Only about 10% of Rs 5,000 crore worth of equity transactions every day are long-term trades. FIIs and domestic investors who met the finance minister recently told him that the 30% short-term capital gains tax applies to nearly 90% of transactions, slowing down rather than speeding up markets. Investors have argued that the one-year cut-off to determine whats a short- or long-term investment is arbitrary. Institutional investors and brokers trade continuously, often holding stocks for as little as a week or fortnight. Every time they make profits in these trades, they pay out 30% instead of 10%.

Investors have suggested two options for reform. One is to scrap the distinction between short and long-term investments and collapse the two tax rates to one. The other is to allow for a tax break if profits from one transaction are reinvested in other stocks within, say, three months.

The finance ministry could lean towards the first option, scrapping the distinction between long- and short-term investments and unifying the capital gains tax rate to 10-15%. The other option might be too clunky to administer. Too many thingsincluding the flow of investor funds from a sale to a subsequent purchase within a given periodwill have to be monitored, cluttering an already-tangled web for the taxman.

In the last three years, reforms have targeted administrative red tape, trying to minimise paperwork and slice opportunities of rent-seeking for the taxman. Chidambaram will be inclined towards a simpler system to tax stock market profits by eliminating the distinction between short- and long-term rates, and blue chip versus common shares.
 

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