STOCK LENDING MUST NOT BE TAXED: EXPERTS

Lending of securities under the stock lending and borrowing scheme through an approved intermediary and the return of equivalent securities of the same type and class by the borrower shall not be treated as disposal of securities. Hence, this would not attract any kind of long- or short-term capital gains tax, according to experts, who discussed the issue at a seminar here on Wednesday. Short-selling is proposed to be introduced shortly and stock lending and borrowing is expected to commence simultaneously. Consequently, it will not attract any kind of long- or short-term capital gains tax, according to a research paper prepared by Dun and Bradstreet on securities lending.  The stock lending and borrowing scheme, slated to start any time now, is awaiting the Central Board of Direct Taxes (CBDT) circular on taxation of the scheme. The scheme has been cleared by both the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI). “CBDT has to identify whether the profit or losses from short-selling will be taxed under the business income or capital gains. Another question is if short-selling will attract Securities Transaction Tax (STT) since transactions done through stock exchanges attract STT,” said Sunil Badala, a partner at BSR&Co.  According to industry group International Securities Lending Association (ISLA), in the year 2007, the balance of securities on loan exceeded $2 trillion globally. Key participants with sufficient-sized security portfolios include pension funds, insurance and assurance companies, mutual funds, foreign institutional investors and unit trusts that work on a long-term investment strategy and have securities available in their accounts.  Around 41.94 per cent of the total equity holdings in the National Stock Exchange-listed F&O stocks are held by non-promoter institutions as on March 31, 2007, according to the CMIE data. “Securities lending becomes an additional source of revenue for these organisations that enables them to offset the custody and administrative charges,” said the report. Sebi has initially proposed the scheme for the 224 securities traded in the futures and options segment. The exchange-based format of the system may not be popular with investors since the rigidity of standardised contracts by the exchange limits players to participate in the SLB market. – www.business-standard.com