It is a no profit-no loss situation for the individual stock market investor. When he buys a security, he will have to pay more, that is, 0.15 per cent as transaction tax.
The tax is applicable to both delivery-based buyers as well as day traders. If an investor buys and holds the security for a long term, he no longer has to pay capital gains tax. However, if he sells the security within a year, he coughs up a tax of 10 per cent.
The Budget for 2004-05 has introduced a turnover tax, or securities transaction tax as it has been named, for all buy-side transactions. The tax, 0.15 per cent of the transaction value, appears to be applicable to debentures, bonds and any marketable security of a similar nature traded on a recognised exchange, though clarity on this is awaited.
The tax is payable by the buyer, not the seller. In other words, an individual does not pay tax when he sells a security. Complying with the tax will be simple since the tax will be collected by the broker when the deal is struck and payment is made to the exchange, which will then pay it to the exchequer. Thus, an individual cannot evade the tax.
The costs incurred in any buy transaction will thus be the turnover tax, brokerage, service tax (which has gone up from 8 per cent to 10 per cent) and the 2 per cent cess on service tax. If the transaction results in a gain in the short term, that is less than a year, a 10 per cent capital gains tax will be applicable.
The benefits to investor, of course, come from long-term capital gains tax which has been reduced to nil from 10 per cent (or 20 per cent for those who avail of indexation benefits). The tax on short-term gains has been slashed to 10 per cent. Earlier it was payable at rates based on the tax bracket.
The long-term investor now has an incentive to hold on to stocks and pay just the turnover tax of 0.15 per cent at the time of purchase. But he can no longer offset his long-term capital losses from securities against capital gains and take advantage of a tax break. Hitherto, these losses could be carried forward for eight years.
However, life will now be simpler from the point of view of filing tax returns. There is no need to keep track of profits or losses. On the flip side, there is no scope to fudge transactions.
Turnover tax will be an additional cost for players and is payable regardless of whether the trade results in a profit or loss. On the face of it, this might seem a trifle unfair. However, the blow has been softened by lowering of short-term capital gains tax and the removal of long-term tax.
Arbitrageurs or scalpers, who trade for small margins, will be particularly hit. For them, life will be difficult. These speculators, who contribute 80 per cent of the volumes in the market, make a big difference to the liquidity and depth and without them volumes will plummet.
Powered by 
