The Hindu Business Line : `Drafted' damage

The relief to investors, such as it was, from Tuesday's uptrend in stock values turned out to be short lived. The market not only recorded its biggest fall in absolute terms on Thursday but also followed it up with another hefty decline on Friday and for the week as a whole to close nearly 11 per cent lower from the previous week. To the litany of usual suspects, from the weakening US economy to commodity prices, a new element has been trotted out to explain the fall. The market players have been quick to fault the latest draft circular from the Income-Tax Department, which had initiated a debate on the need for concessions and exemptions enjoyed by all manner of taxpayers, including corporate assessees.

Though, in theory, the Department only sought to initiate a debate on the need for the continuance of such exemptions, the general public cannot be faulted for thinking that it favours their abolition. In particular, the Department has sought a debate on the issue of withdrawal of tax exemption for profits on sale of listed stocks held for an extended period and, by extension, the concessional rate of tax applied on short-term gains on these instruments. If this in itself were not enough to send shivers down the spine of the market players, the Department followed it up with another draft circular which sought to revisit the concept of trading in stocks as a business activity as opposed to holding it for personal enjoyment with the former being liable to be treated on a par with any other business activity and taxed accordingly. It sought to lay down certain elaborate criteria, thus leaving no room for any subjective interpretation at the assessment stage, for establishing whether a transaction fell under one or the other category. Corporate and investment profit being at the core of investor sentiment, understandably it had some role in the steep decline.

To that extent the crisis was not entirely "manufactured", as the Finance Minister has alleged. If anything, his clarification that foreign institutional investors have always been treated as investors and not as traders is somewhat disingenuous. The issue was really not one of labelling any class of investors as one or the other but really whether the proposed new tests sought to restrict the scope of tax exemption that was assumed to be available. By skirting the issue, he has only confirmed the worst suspicions of the investing community. An exemption from tax of profits on sale of listed securities was intended to bring more investors to the stock market and help capital formation in the economy. It would have been preferable if the latest criteria had been put in place then and not a year later to avoid investors misconstruing the nature of the concession in the interim.

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