"Several instances have come to light, in which small, nondescript scrips are deliberately declaring the dates of the transactions to pass off short-term capital gain as long-term capital gain in the stock market," a finance ministry official said. Long-term capital gains do not attract any tax.
Officials said the misuse of the differential tax regime was particularly seen for transactions undertaken in the financial year 2005-06.
The finance ministry had, in the Finance Act 2004, introduced the securities transaction tax and made changes in the treatment of capital gains. While short-term capital gains were taxed at 10 per cent, long-term capital gains were exempted from tax.
The Act also provided that a dealer in securities would be able to obtain credit for securities transaction tax against the income tax payable on the business income declared. However, no refunds are allowed.
Earlier, an internal report on black money, prepared by the income tax department, had also highlighted the misuse of the preferential tax regime for converting black money into white money.
It had pointed out that some investment firms operating in a regional stock exchange were initially trading at a very low price of around Rs 2 per share, which would later be jacked up to Rs 100 or Rs 200 per share through circular transactions.
Once the price of the share was hiked, shareholders would sell the share and earn capital gains, which would either be taxed at 10 per cent or not taxed at all.
The report had called for differential tax treatment to be restricted to shares of established companies listed in Group A, B1, and B2 of the Bombay Stock Exchange.
Watching Closely
- Earlier, an internal report of the I-T department on black money had pointed out that some investment companies operating in a regional stock exchange were trading at a very low price.
- The companies were initially trading at around Rs 2 per share, which would later be jacked up to Rs 100 or Rs 200 per share through circular tradings.
- Once the price was hiked, shareholders would sell the share and earn capital gains, which would either be taxed at 10% or not taxed at all.
- The report had called for differential tax treatment to be restricted to shares of established companies listed in Group A, B1, and B2 of the Bombay Stock Exchange.
