Block of securities and STT

[CA DEV KUMAR KOTHARI]

Budget suggestion:

Security transaction tax (STT) as tool of tax collection and system of ‘block of assets’ for simplification of taxation on income from dealing in securities.

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), capital gains under block of asset system for short-term block of securities and long-term block of securities.

Security transaction tax (STT)- litigation under Income-tax Act:

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 with concept of block of assets:

STT is simple in collection and monitoring by tax authorities because persons liable to collect and pay STT are well organized, 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 taxable gains in block of short term securities tax @ 15% may be charged.

For taxable gains in block of long-term securities tax @ 10% may be charged.

Formulae for block of securities and tax on gains:

In block of short-term capital securities, the following formula be applied:

Short-term securities / assets brought forwarded from previous year add cost of acquisitions, minus cost of securities becoming long-term, transferred to long-term block.

From the remaining block of assets for short term securities/ assets, sale value of short term securities be deducted, if sale value is greater, the excess be taxed as short-term capital gains.

If sale values is less, balance amount in block of short-term securities shall be carried forward.

In case all securities in block of short term securities are sold / transferred to long –term block and there is no security left, then if sale value is less than value of block the excess of value of block over sale value shall be short-term capital loss which will be carried forwarded for set off in future. 

Example in tabular form: Block of short-term securities:

Cost of short term securities b/f	Cost of securities acquired	Cost of securities transferred to long term block	Sale value of short term securities	Short-term capital gains/ loss	Balance value of Short term block
A.Case of	continuing	Block at	year end
100	100	50	80	-	70
B. case when	Block is	Exhausted-	Case of gain
100	100	80	150	30	0
B. case when	Block is	Exhausted-	Case of loss
100	100	80	80	(40)	0

Block of long-term capital securities:

Cost of long-term securities brought forwarded from previous year to which following adjustments are made:

Cost of any security becoming long-term and transferred from block of short-term security to long-term security to be added to Block of long-term capital securities.

Sale value of any long-term security is deducted from block. If sale value exceed costs of security brought forwarded in block of long-term capital securities and cost of securities transferred from short term security block, then the excess shall be long-term capital gains on long-term securities. If sale value is less, the value to be carried forwarded in block of long term securities shall be balance amount.

In case all securities are transferred, and sale value is less than the value of block, the excess of cost over sale value will be long-term capital loss.

Example in tabular form- block of long-term securities:

Cost of long- term securities b/f	Cost of securities transferred from short term block	Sale value of long term securities	Long -term capital gains/ loss	Balance value of long- term block
Case of	Block	Continuing at	year end
100	100	80	-	120
B. case when	Block is	exhausted	Case of gain
100	100	250	50	0
B. case when	Block is	exhausted	Case of loss
100	100	180	(20)	0