CBDT WANTS CAPITAL GAINS TAX FOR ALL FIIS

Seeks amendment to Section 115 of the Income Tax Act. The Central Board of Direct Taxes (CBDT) has proposed several measures that are expected to have far-reaching implications for the capital market. In its pre-Budget proposals to the finance ministry, CBDT has sought an amendment to Section 115 AD of the Income Tax Act so that all foreign institutional investors (FIIs) pay capital gains tax on their profits in India. At present, the gains made by some FIIs (they invest Rs 50,000 crore to Rs 60,000 crore in Indian capital markets) are treated as business income and are not taxable on the grounds that these institutions do not have permanent establishments in India. CBDT has cited the instance of the order given by the Authority on Advance Ruling (AAR) in the case of Fidelity Advisory. In its ruling in January last year, AAR said the income of Fidelity Advisory will be taxed as capital gains and not as business income and that the decision will be binding, irrespective of whether India has a double taxation treaty with an FII’s country of origin. CBDT has also sought a clarification from the ministry on whether derivative market transactions should be taxed as speculative deals, capital gains, or business income. In a case involving Morgan Stanley, the AAR had held that income from derivatives would be classified as business income based on certain distinct features of the derivatives and frequency of transaction. On the other hand, Section 43(5) of the IT Act, which defines speculative transactions, has clarified that under the Securities Contract Regulation Act, derivatives transactions will be deemed as capital gains. This leads to confusion and the government should clarify its stand in view of the increasing volume of transactions in the derivatives market, CBDT has said. In yet another far-reaching proposal, the apex tax body has said that the exemption of income from long-term capital gains on sale of shares be restricted to the stocks in the BSE 500 index to avoid rampant manipulation in so-called penny stocks. Also, the time limit for calculation of long-term capital gains should be more than 36 months. CBDT is also in favour of a uniform method of taxing income on share transactions. The department has observed that when assessees take deliveries of shares, they classify them as investments that attract capital gains. However, if the transaction is an intra-day trade, it is specified under stock-in-trade which is classified as business income. Sources close to the developments said since the rate on short-term capital gains has been cut from 30 per cent to 10 per cent, such a classification is resulting in huge revenue losses. CBDT has, therefore, said income from all share sales should also be classified as business income and taxed at 30 per cent. Alternatively, all shares transactions should be uniformly declared under capital gains. – www.business-standard.com