Mr. Motilal Oswal, CMD, Motilal Oswal Financial Services Ltd

Article on Pre Budget Over the last few years we have seen tax rates at the individual and corporate levels stabilizing at near realistic levels. In earlier years indirect taxes on individual items would be tinkered every year e.g. the excise duty on ball bearings would be hiked, while those on pressure cookers would be reduced. With all this tinkering in individual items a thing of the past and with stable tax rates the budget has almost become a non-event. In response to the world crisis the two FMs P. Chidambaram and Pranab Mukherjee have provided stimuli to sustain the economy. This has been through lowering of tax rates, reduction of excise duties and lowering of the service tax rates. While this has had the necessary effect and Indian industry has been buoyed up with the GDP growth in 2008-09 at a healthy 6.7% .GDP growth in the current year is expected to be above 7.5%. India has become the cynosure of all eyes in the way it has handled the crisis. One side effect of the steroid therapy has been the inflation problem with food inflation at over 17% and RBI expecting inflation at the year end to be at 8.5%. The fiscal deficit is also expected at the unacceptable level of 6.8%. The budget is expected to taper off the dosage of the drug therapy. One hopes that the FM will calibrate the stimulus withdrawal so as to not send the patient downhill, as the patient has just shown signs of revival. The global crisis which is lurking around could well reach India's shores.
The market has over the last three decades has had much to be thankful for. Pranab Mukherjee in the eighties had removed TDS on dividends up to Rs. 1000 and in the following year raised this limit to Rs. 2500. Long term capital gains are treated at concessional rates over the years. In the budget for the year 1997-98, P. Chidambaram made equity dividends totally tax free in the hands of the shareholders, while leving a tax on the dividends paid out by companies. Earlier, along term asset was defined as one that had been held for a period of at least five years. This was reduced to three years in line with the "long term" definition prevailing in the US. This was further altered to one year, which is where the position stands today. Earlier, short term capital gains were taxed at the marginal tax rate. This has been changed and the tax rate for short term gains is a concessional rate of 10%. The rationalization of capital gains taxes was made possible by a simultaneous introduction of STT i.e. securities transaction tax. This was a tax on share market transactions and was charged by brokers on buy and sell transactions from clients. This has made life easier for both the investors as also the exchequer. The income tax department gains more through STT than it has lost through rationalization of capital gains. The market looks for stability to be maintained and hopes that the FM in the attempt to balance the budget would not tinker with the current tax regime relevant to the equity market except the items discussed below.
The market has one big hope from the budget on an issue that has been a sore point for the market. This is the question as to what distinguishes short term gains from speculative gains. Also there is lot of litigation about income from securities held for long term being taxed as business income in hundreds of cases. Short term gains i.e. those of holding period less than one year are taxed at a rate of 10%. But, some of these can be rightly classified as being speculative in nature. Speculative gains are on futures and options transactions and are rightly taxed as business income at the marginal tax rate of 30% plus surcharge. The dilemma arises in delivery based transactions which are short term. The income tax department has a long list of criteria to distinguish between short term gains and speculative gains. The investor is not sure till his assessment is over whether he will be taxed at 10% or 30%. Common sense demands that the investor should know before hand what his tax liability is. The market expects that the FM settle this issue through the budget. All F&O transactions should be classified as speculative. Delivery transactions of holding period less than one month should be also classified as speculative. Transactions between one month and one year should be classified as short term, eligible for the concessional tax rate of 10%. All income from securities held for more than one year must be taxed as capital gain and not as business income. This should solve once and for all the ambiguities and the litigations arising from it.
Market also expects abolition of surcharge and also reduction in STT rates.

Mr. Motilal Oswal