Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Thu, 02 Mar 2006

Capital gains tax

I wrote a piece in yesterday’s Financial Express about the budget proposal related to capital gains taxation and securities transaction tax. I wrote that the government seems to have realized that its decision two years ago to replace the capital gains tax on securities with a tax on securities transactions was a mistake. My article makes the following points:

Posted at 14:19 on Thu, 02 Mar 2006     2 comments     permanent link


Ramesh Gupta wrote on Mon, 06 Mar 2006 11:21

Re: Capital gains tax

Your comments technically may be correct in terms of option pricing. But taxation decisions are not based only on technical grounds. STT tax has more dimension than just mopping funds for government. It is cost of doing business(particularly speculative) and further it could also be interpreted as kind of turover tax. In fact I had suggested this kind of tax way back in 1999 (see my Working paper titled "RETAIL INVESTORS AND THE BUDGET 1999 AN AGENDA"

"Till the stock exchanges and SEBI get their act together to control this unwanted volatility and come up with a system which would encourage a healthy investment climate, government may levy a small tax on stock exchanges' turnover. This will be akin to the proposed Tobin tax on international movement of hot capital which is creating havoc with the global financial system. The total turnover of Indian stock exchanges in 1997 98 as per SEBI annual report was Rs. 908691 crore. This year it is expected to increase by 35 per cent which means a turnover of Rs. 12 lakhs crore. Even if 0.01% (that is Re.1 for every Rs.10000 value of trade) tax is imposed, the collection could be about Rs. 120 crore. This tax would be collected from stock exchanges and not the trading members/brokers to avoid administrative has¬sles. The government may think of exempting small stock exchanges from this tax to give them breathing space from competition. These funds can be used to strengthen the capital market and help in spreading the equity cult among retail investors."

I am glad Finance Minister did it in 2004. Inclusion of Capital gains tax for corportions in MAT is correction of an omission which Ministry officials did while drafting 2004 Finance Bill; and which now has been corrected.

gistout wrote on Sat, 15 Sep 2007 08:56

Re: Capital gains tax

"The capital gains tax is like ....."

Just a notification of being cited as quotable metaphors/analogies in "Archive of Metaphor and Analogy". Thank you.