According to Deepak Sancheti, additional commissioner of Income-Tax, Mumbai, all categories of investors/ traders including FIIs, even Mauritius based, will be taxed uniformly.

The FIIs, which were earlier taking advantage under international direct tax treaties will be taxed for the first time. Thus STT has enabled the government to generate revenue in a neat, efficient and easy to administer manner accepted internationally.

However there are still some issues with regard to the STT at least from the point of view of the tax authorities. Sancheti has reasoned this out.

"As per section 70 of the IT Act, (sub section (2) &(3)) capital loss resulting from transactions subjected to STT will be allowed to be set off against capital gain on other assets. Thus though the gains will be taxed at a concessional rate, loss will mitigate tax liability at higher rates that is at the tax rate applicable to that person. As per Section 48 of the IT Act, the STT will be allowed as deduction while working out capital gains," Sancheti says.

Where the specified securities transactions result into business income for any person or entity, they will be allowed income tax rebate under section 88E of the I.T. Act. The amount of rebate will be limited to the STT paid on such business transactions or the average tax on such business income, whichever is less.

In case of refund of excess tax collected, in assessments under the Income Tax Act, the refund is made directly to the claimant.

However, in the case of STT, refund will be made to the respective exchange/ mutual fund, to be in turn passed on to the client/ investor.

Where a client has already made a claim for rebate under Section 88E of I.T. Act and also gets a refund of STT, it may become difficult for the I.T. Department to reconcile such refunds and rebates, particularly because client registrations with brokers are not always on the basis of PAN alone.

Sancheti has estimated, that based on the trading volumes of NSE and BSE in 2003-04, and mutual fund redemptions (data released by Sebi), substantial revenue of Rs 1,500-2000 crore (Rs 15-20 billion) would be collected as STT on an annual basis at the current rates of STT.

"This year, as STT has become effective on 01 Oct 2004, approximately Rs 1,000 crore (Rs 10 billion) may be collected. However, as rebate will also be granted under Section 88E of the IT Act, it will be difficult to work out net collections under the changed regime.

Another problem with STT is that industry participants are not clear whether subscriptions to IPOs through book building route on exchange systems will be subjected to STT.

"Similarly there are doubts whether buy-backs through reverse book building, rights renunciations and trading in warrants will be subjected to STT," says Sancheti.

It is apprehended by certain categories of investors that they may have to bear higher incidence of STT. Mutual fund investors will be subjected to STT twice - first when the mutual fund trades and pays tax thereby impacting the NAV and subsequently when the investors purchase or sell units.

Similarly arbitrageurs who take delivery in cash market will be paying @0.15 per cent though practically their transactions comprise simultaneous sale and purchase in different markets.

On the other hand some other anomalies may be ironed out. The exchange system will compute the transaction tax on the basis of client identity entered by the broker.

Therefore, any mistakes in the client ID have been allowed to be corrected within 45 minutes of the close of the trading. As the incidence of STT is on the basis of client IDs used, brokers will now be forced to use correct IDs so that the tax is not determined on higher side.

Sebi regulations require that sub-broker clients will be treated as direct clients of brokers from 01 Dec 2004.  However, before this happens, sub-broker clients may get clubbed as a single client resulting lesser levy of STT for two months.