Budget STT-umps markets

The budget proposals were a dampener for the stock markets. The Finance Minister hiked the short-term capital gains tax from 10% to 15% in order to encourage investors to stay invested for a longer-term but market players termed it as a sentiment-spoiler.

"What it does is that it makes the perceived sentiment of investing in equity markets less attractive," Anoop Bhaskar, chief investment officer, UTI Mutual Fund, said.

It was the other proposal of the Finance Minister--  securities transaction tax (STT) to be set off as a business expense rather than against other taxes paid which was the case earlier-- that hogged the limelight.

According to the proposal, the amount of STT paid by the broker will be allowed as deduction under Section 36 of the Income Tax Act only if the income from these transactions is included under the head "profits and gains of business or profession". The amendment will take effect from April 1, 2008, and will apply in relation to assessment year 2009-10 and subsequent assessment years. The rebate will not be allowed in or after assessment year beginning April 1, 2009.

Brokerage houses, who trade in proprietary accounts, jobbing and arbitage, would be hit since the tax set-off is now likely to be only a third of that (since the tax rate is about 34%). "We did not expect this at all," said Nirmal Agarwal, president, Association of National Stock Exchange Markets of India (ANMI). ANMI is planning to make a representation to the Finance Minister over this issue on March 6 at a convention of brokers.

The Finance Minister has also proposed to bring stock markets, commodity exchanges and clearing houses under the service tax net. As per the proposal, the service tax would be charged by stock exchanges on the exchange transaction fees, listing fees, data discrimination charges (data provided to brokers by exchanges for fees) and on property rent if any being received by the stock exchanges. The service tax would be passed on to the stock brokers, which they would set off with the service tax on brokerage.

A long-standing demand of brokers has been met with the proposal  to charge STT only on the premium of the options trades and this will be collected from the seller. In case of exercised options, it will be charged from the buyer. The amendment comes into effect from June 1, 2008.