Business Incomer or Investment Income
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Date:14/07/2007 URL: http://www.thehindubusinessline.com/2007/07/14/stories/2007071450290900.htm Taxing investment gains — Getting the right measure P. B. Ramanujam The Sensex is firmly trading above 15K at least for now. Three cheers! The first, of course, to the investor, both domestic as well as foreign who have shown conviction in the India story. The second and the third to the Central Board for Direct Taxes for the crafty circular (4/2007 of June 15) which will make CBDT the winner irrespective of the game! One hopes this will not be the final tally and the judicial forum known for its balance will deliver. The honour for the first cheer is the only common link between the Foreign Institutional and the local investors. They share a different perspective when it comes to taxation of gains. While the FIIs would want it to be called business income (and, therefore, no tax as the broker nexus is not PE), the local investors want it as capital gains. The Revenue would want to tax both respectively as capital gains and business income! At least that is what appears from the Circular. Fiscal laws and their implementation are possibly the single largest set of litigations in India, because, with the sight of a possible conflict, both, revenue and the taxpayer interpret the legislation to suit their interest. The Revenue, with all its powers and despite the judiciary saying time and again that it cannot administer tax through circulars particularly when it is detrimental to the interest of the assessee, continues to indulge in it; the latest circular being a case in point. As with every other departmental circular, it has a binding nature on the assessing officer, though the assessee, has a right to dispute it. But being a departmental circular, the only other forum which can take a different view is the judiciary, to which the assessee has to progressively reach through litigation! The circulars’ purported aim is to provide tests to decide whether shares held by an assessed is an investment or a stock-in-trade. The distinction becomes material, as gains from stock in trade would get taxed as business income while that from investments would be treated as capital gains. Who is the intended ‘assessee’? The circular is issued without specifying any group of assessee. However, a plain reading shows that the intended target is the FII. The Department would have done well to be more specific. The assessing officer is endowed with a bent measuring stick, and litigation appears to be the only solution to get the right measure. Friday, July 13, 2007 Sensex , ACC LTD 1,095.80 +23.40 AMBUJA CEME 128.90 Page 1 of 2 7/14/2007 http://www.businessline.in/cgi-bin/print.pl?file=2007071450290900.htm&date=2007/07/1 ...
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Date:14/07/2007 URL:http://www.thehindubusinessline.com/2007/07/14/stories/2007071450290900.htm
Taxing investment gains — Getting the right measure
P. B. Ramanujam
The Sensex is firmly trading above 15K at least for now. Three cheers! The first, of course,to the investor, both domestic as well as foreign who have shown conviction in the Indiastory. The second and the third to the Central Board for Direct Taxes for the crafty circular(4/2007 of June 15) which will make CBDT the winner irrespective of the game! One hopesthis will not be the final tally and the judicial forum known for its balance will deliver.
The honour for the first cheer is the only common link between the Foreign Institutional andthe local investors. They share a different perspective when it comes to taxation of gains.While the FIIs would want it to be called business income (and, therefore, no tax as thebroker nexus is not PE), the local investors want it as capital gains. The Revenue wouldwant to tax both respectively as capital gains and business income! At least that is whatappears from the Circular.
Fiscal laws and their implementation are possibly the single largest set of litigations in India,
because, with the sight of a possible conflict, both, revenue and the taxpayer interpret thelegislation to suit their interest. The Revenue, with all its powers and despite the judiciarysaying time and again that it cannot administer tax through circulars particularly when it isdetrimental to the interest of the assessee, continues to indulge in it; the latest circular beinga case in point.
As with every other departmental circular, it has a binding nature on the assessing officer,though the assessee, has a right to dispute it. But being a departmental circular, the onlyother forum which can take a different view is the judiciary, to which the assessee has toprogressively reach through litigation!
The circulars’ purported aim is to provide tests to decide whether shares held by an assessedis an investment or a stock-in-trade. The distinction becomes material, as gains from stock intrade would get taxed as business income while that from investments would be treated ascapital gains.
Who is the intended ‘assessee’?
The circular is issued without specifying any group of assessee. However, a plain readingshows that the intended target is the FII. The Department would have done well to be morespecific.
The assessing officer is endowed with a bent measuring stick, and litigation appears to bethe only solution to get the right measure.
Friday, July 13, 2007 Sensex , ACC LTD 1,095.80 +23.40 AMBUJA CEME 128.90
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The circular says that an assessee can have two portfolios one for stock-in-trade and theother for investment. It is good to read, but difficult to implement. Look at the speed withwhich the market has taken the index from, say, 12,000 to 15,000. What should a holder of shares do now? Is it safe to hold? Invest? Sell? Views differ.
An equity investment is not ‘put your money and close your eyes and ears’ stuff. Thecomplexion of the investment changes with the market and events. What initially starts as aninvestment might become a stock-in-trade with events during the year or vice-versa. Or, onemight see an opportunity to trade on the back of the shares acquired as investment, changingthe nature of the holding.
Will the Department look at the end or the start position? Will it refuse to take note of theshifts in the market? Or, deny an investor the benefits of genuine market based transitiondecisions? How will it read the motive of the investment? What will be considered thetransition point from investment to trading holding or vice-versa? The circular offers nary aclue. Also is it fair to look at dividend yield to gauge the motive of investment, unless we aretalking of Widow Shares? Every investor today is looking at not just dividend, but totalreturn. The laws have already effectively prevented dividend stripping. Why again use a
bent measuring stick?
Magnitude of purchase and sale
The second criterion to be used is the magnitude of purchase, sale and holding. Surely theseare related to the operations of the assessee. An individual assessee, even when he makes aninvestment works with unwritten rules.
Market basics: First, the market is never linear. Second, changes in the market are lumpy.Third, timing the market is simply not possible. And, finally, the love is for money and notfor the stock.
Take the case of the market falling very sharply immediately after an investor has made aninvestment. The markets show huge volatility. Does the Department want the investor tosimply sit back, because buying and selling would render his investment as stock-in-trade?OrA similar thing can happen if the market goes up too soon and the investor may want toprotect his gains. How will the Department segregate the trading and investment portfolios?It looks as if the circular has been crafted without reference to the investment habits of individuals and institutions but for a static snail-paced market.
Method of accounting
The last (said first in the circular) criterion is how the investor is accounting for it. Thedifference is whether the holding is marked to market when there is drop in value.Accounting, fortunately, gives us the time literally till the end of the year. Despite all thequarterly requirements/advance tax, etc., it is possible to defer a final view till the very last.
(The author is a Chennai-based management consultant. He can be contacted [email protected])
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