Transaction tax nets gains

INVESTING

Securities transaction tax (STT) will be applied to all equity transactions (as well as mutual fund transactions) from tomorrow, October 1, 2004. What is the tax and how would it impact the lay investor?

Very simply, every investor will have to pay a certain percentage of total traded value as tax to the government. How much you pay will depend on what kind of an investor you are.

So suppose you buy shares and take delivery, you will pay 0.075 per cent on the total value of your transaction. So if you bought shares worth Rs 1 lakh you will have to pay Rs 75 on that. Same is the case if you sold the shares.

The broker, who is buying and selling the shares on your behalf, will give you a STT-deduction bill at the end of the day. This will give you an idea of how much money you have paid out as tax.

But let's consider the case where you have not taken delivery of shares "" that is, at the end of the day you have squared off your open position "" then STT will be levied at 0.015 per cent either way.

In other words, if you have purchased 100 shares in the morning and sold them off before close you will have to pay tax at the rate of 0.015 per cent on both legs of the transaction "" for the purchase and the sales.

Same would be the case if you are arbitraging "" trading on the basis of price differential on different bourses. Remember, how that the tax would be paid irrespective of whether you make a profit or not.

For a day trader (one who buys and sells shares on the same day) the total tax incidence would depend on the number of trades done and the total value of such trades.

Of course at the end of the day if you are left with a net surplus, you have to pay capital gains tax at the rate of 10 per cent instead of the crippling 30 per cent now.

In the case of mutual funds the applicable rates would be 0.075 per transaction. All the other rules apply similarly. Now look at the implications.

If you as an investor make a short-term gain of say Rs 20,000 on an investment of Rs 1 lakh, then under the current tax regime (which ends today), you do not pay any transaction tax but you pay a short-term capital gains tax at the rate of 30 per cent. Which means you pay Rs 6,000 as tax after which you are left with a profit of Rs 14,000.

Under the transaction tax regime, you would have to pay Rs 75 as tax on an investment of Rs 1 lakh. Subsequently, if at later date you sell the shares for Rs 1.2 lakh (Rs 20,000 profit), you would have to pay Rs 90 as transaction tax.

Since you have made a short-term capital gain of Rs 20,000, you have to pay tax on it at 10 per cent, or Rs 2,000. Thus your total outgo is Rs 2,165 and your net profit is Rs 17,835.

The short point being, under the new regime you are a net gainer.