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To prevent money laundering and tax evasion through misuse of securities markets, leading stock exchange BSE has suggested removal of the long-term capital gains tax exemption on transactions in stocks.
The suggestion, made by BSE in a letter to the Finance Minister, follows a continuing crackdown by the capital market regulator Sebi on hundreds of entities found to have misused the stock market platform to launder black money and evade taxes, including through BSE's own SME trading platform.
The BSE said such events have taken place because of the tax arbitrage arising out of the exemption from long-term capital gains tax.
At present, no long-term capital gains tax is levied for stock market trades if the investment is held for more than a year.
According to the BSE, the modus operandi typically involves making a preferential allotment to known entities. These shares are locked in for a period of one year if allotted to non-promoters and for three years if allotted to promoters. Then the prices are moved upward surreptitiously, while avoiding the surveillance radar of the exchanges, on low volumes till the one year lock-in period expires.
"Upon the securities being free lock-in, the entities sell off the same through stock exchanges by paying the small amount of securities transaction tax (STT) and get full benefit of exemption from long term capital gain tax (LTCG)," BSE said in the letter.
"It seems therefore that the hidden reason of some of these companies that are traded infrequently/not available for trading is primarily to get huge LTGC tax benefit by paying minuscule amount of STT," BSE added.
BSE has proposed that the "current differential capital gains treatment between listed and unlisted securities should be harmonised" to prevent any tax arbitrage and tax evasion.
The BSE had recently said it suspended over 40 companies listed on it main board for indulging in such activities.
