Exchanges duel with transaction tax plans

Stock exchanges are considering a proposal to levy the securities transaction tax on the weighted average price of the scrip, for all transactions executed on the exchanges in the cash segment on that day.

In the derivatives segment, the transaction tax will be levied on the trade price (for futures contracts), and on the strike price plus the premium for option contracts.

Sources said both the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) were working to get the tax collection system in place.

Securities and Exchange Board of India (Sebi) Chairman GN Bajpai had, at a recent public event, said the tax might be implemented from October 1.

"The exchange is working on fine-tuning the software to accommodate the proposed transaction tax and the system will be in place to meet the deadline," Rajnikant Patel, chief operating officer and chief financial officer of the BSE, said.

The exchanges are working on a number of proposals in the absence of any "guidance" or a "plan of action" from Sebi.

The regulator had only issued a notice to the exchanges advising them that under the provisions of the Finance Bill, they had been entrusted with the responsibility of levying, collecting and remitting the tax on all transactions, from the date of notification by the government.

Brokers are opposing the weighted average price proposal on the grounds that it is unfair. Various options are being considered, including a tax on the actual trade price. The weighted average method was considered to be the most transparent, sources said.

"Ideally, the tax should be charged on the actual traded price, at which the client order is executed. Otherwise, it should be charged on the closing price of the scrip that day, which is nothing but the weightage average price of the last half-an-hour," said Motilal Oswal Securities Chairman and Managing Director Motilal Oswal.

A lack of clarity persists on the transaction tax issue as the effective date of its implementation has not been notified as yet, despite the Finance Bill being passed by Parliament.

The exchanges propose to collect the tax from brokers at the time of pay-in and give it to the income-tax department by the first week of October.

According to the Budget for 2004-2005, a tax is to be levied on all transactions on stock exchanges. All delivery-based trades in the equity cash segment will attract 0.15 per cent tax, but the levy will be split equally between the buyer and the seller.

For day-traders and arbitrageurs, the tax will be 0.015 per cent and they will be allowed to take credit for the tax against business tax on profits. For derivative traders, the tax will be 0.01 per cent and they too will be allowed to take credit for the tax against business tax on profits.