Financial Daily from THE HINDU group of publications
Monday, Jul 05, 2004
Markets - Stock Markets
Should the Government go in for turnover tax?
Yes. This will bring in transparency
INDIA is amongst the fastest growing economies in the world today and needs the foreign inflows to sustain the pace of growth. FIIs' decision on where to invest the funds while largely dictated by the growth prospects is also influenced by the conveniences of the investment - repatriation process.
Other markets in the region have done away with capital gains tax and Malaysia has introduced turnover tax and the markets are working fine. India currently allows "no tax" benefit to funds through Mauritius, Spain, Cyprus and UAE.
Most foreign investors, to avoid taxes, come in through these gateways despite the cumbersome process of adding a layer to the operational set up. Selective gateways serve no purpose beyond elongating the route for the investors - by allowing the money to come in directly from all sources the Government will promote not only ease and transparency in the inflows but also encourage many more investors to enter the market.
Many foreign investors, particularly NRIs, shy away from the paperwork involved both while investing in India and while repatriating the money back. A swift no-hassles system such as turnover tax will definitely encourage even NRIs to invest more. Mutual funds and domestic financial institutions will be able to market their products aggressively if there is a stable tax regime.Individuals who currently pay 30 per cent tax plus surcharges on their short-term capital gains should be happy to pay a lower turnover tax. Even the long-term capital gains tax, currently at 10 per cent, is many times higher than the proposed turnover tax.
Added to this benefit is the ease with which tax returns can be filed. The presumption here is that the reduction in paperwork will bring more investors into the market.
It is argued that the short-term day traders bring the much needed liquidity and they will not be able to bear the additional cost and therefore the liquidity will be eroded.
This can be dealt with by having a miniscule turnover tax, with the full understanding that the successive governments or budgets will not tinker with the tax rate for an extended period of time, say 15 to 20 years. Governments are always tempted to increase taxes and this could be counter productive.
From the Government perspective the estimated collection on account of turnover tax, charged at even 3 to 5 basis points will yield a collection higher than from the combined collections of short and long term capital gains taxes.
The vexed issue which needs to be addressed is whether constitutionally the Government can tax gross receipts or only income.
We must appreciate that in our markets no change is welcomed with open arms. Human nature is resistant to change and this change, like any other, will probably result in an initial dip in volumes. But the evolution of the markets has to go on and any one constituency should not be allowed to impede such progression.
The author Gul Teckchandani is Chief Investment Officer, Sun F&C. The views expressed here are his own and not necessarily those of his firm.
Inappropriate, too simplistic and unjust
THE very thought of replacing long and short capital gains taxes, with turnover tax is too simplistic a solution for a complex problem. Any Finance Minister, why single out Mr Chidambaram alone, will salivate at the very thought of taxing the stock market turnover.
The electronic nature of the markets makes it absolutely leak proof and brings about a certainty of tax inflows. But that is no reason why this should be done.
Stock market regulars will tell you that traders lose in more than 90 per cent of the cases. This will only increase their loss. It is therefore principally wrong to tax the turnover, as you are not taxing profits.
The second reason why this should not be attempted is that a large part of this daily turnover is provided by the arbitrageurs and the jobbers, who provide the liquidity. These hawk-eyed specialists thrive on a one paise difference. If they were to pay even a half a paise tax, the liquidity will just vanish. The impact cost of a transaction will shoot up and even a Rs 200-crore selling by an FII could send the markets tumbling like the proverbial Jack and Jill.
Any move that would reduce liquidity or increase impact cost will drive the FIIs away, although they may be the ones who may have ordered the genie out of the bottle in the first place.
Thirdly mutual funds too may suffer. At this point of time mutual funds can shuffle their portfolios several times over as their income is not taxed. After the turnover tax their transaction cost will also go up.
A large part of the money that finds it's way into the mutual fund equity schemes is from large investors, who despite having the skill and the expertise to shuffle portfolios themselves prefer to route it through the funds because of the tax efficiency of the mutual funds. These inflows may reduce.
There is still a large part of the community on Dalal Street that deals in stocks but classifies its income as business income. Would that be tax-free as well? How would you treat stock transactions that are not listed? What about stocks that investors hold today and sell in the new regime? Will it be tax free? If yes, it will be the biggest gift any finance minister can give to investors. If not, who will foot the bill of the turnover tax, if capital gains are also to be paid.
I am sure the answer to these questions can be suitably structured, but it is the very imposition of turnover tax that I oppose. I
f it does come, then Andhra farmers may not be the only ones committing hara-kiri. They'll soon have company of marginal brokers of Dalal Street as clients will demand that the broker pay the tax.
The author Vinod Sharma is Director, Anagram Securities Ltd. The views expressed here are his own and not necessarily those of his firm.
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