Budget suggestion:

Security transaction tax (STT) should be considered as advance income-tax, like TDS ,and income be taxed, with some specified period of holding, normal and special rates of income-tax.

Synopsis:

STT may be considered as advance tax. Rates may be increased by 1.5 times and double of rate may be applied to persons not having PAN. Incomes of different kind may be assessed as trading profit (assets held for less than 60 days), short term capital gains (assets held for more than 60 days but less than 365 days) long-term capital gains (assets held for365 day or  more).

Security transaction tax (STT) was introduced to simplify taxation of income from security transactions, however, over period of time we find that post STT, litigation in respect of income form security transactions has increased and in many cases it has resulted in to nightmare situation for many assessee because of disallowances on expenses. STT and exemption or low rate of tax has also caused suspicion in mind of tax authorities. Unfortunately tax authorities are using authority in abusing and blatant allegations on tax payers by use of words like you have evaded tax on income by way of capital gains, just based on hearsay and presumptions and bias. Many proceedings have been started for reassessment, revision etc. even in case of small tax assesses.

STT is in lieu of tax on income, When STT is levied long-term capital gains are exempted and short-term capital gains are taxed at lower rate of tax. Therefore, in fact there is taxation by way of STT which is in lieu of income tax.

STT is payable even when there is no profit, e.g. when security is purchased, STT is paid even if at the time of sale there is loss.

STT is not allowed in case of investors. So it is in nature of tax on income.

In case of investors, short-term capital gains are taxed at lower rate if STT has been paid at the time of sale and in case of long-term capital gains on certain type of securities long-term capital gains are exempted. However, such exemption is taxed otherwise by disallowing expenses.

In case of traders STT is allowed as an expenditure only in respect of transactions which resulted into business profit or gain and not in loss resulting transactions.

So this computation is a very complex, if properly made. As a result many small traders do not claim STT.

Simplification of STT vis a vis Income-tax:

STT is simple in collection and monitoring by tax authorities because persons liable to collect and pay STT are not many and all transactions are recorded in computerized and mostly on line basis.

STT should be considered as income-tax paid and credit for STT should be allowed to all assesses- trader, investor, against liability of income-tax in any manner. So STT may be made a simple instrument of collection and its credit may be allowed just like tax paid, Tax deducted at source.

STT should also be considered as part of advance tax paid on behalf of assessee and allowable credit against income-tax installments of advance tax just like case of TDS.

Rate of STT may be increased slightly say about 1.25 times from present rates.

In case there is no PAN, a higher rate may be applied (say 2 times of rate applicable in case of PAN holders.

Transactions in security be made taxable (by way of income-tax as follows:

Intra-day gains, hedging gains, gains from security lending, etc. as business income or income from other sources, as assessee may choose. – Normal rate of tax be applied.

For security held for less than 60 days (two months) – considered as trading profit and  may be assessed as business profit or income from other sources as the assessee may choose.- normal rate of tax to be applied.

For securities held for more than 60 days but less than 12 months – short-term capital gains may be taxed at concessional rate of say 15%.

For securities held for more than 12 months – long-term capital gains – tax @ 10%.

Difference of taxation on income from different securities like quoted shares, un-quoted shares, units of mutual funds of different kinds, may be removed.