Market-boosting measures fall short ::Business Line

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

The Government's concern for the ailing stock market was evident in the Budget speech. But the proposals related to this segment fall somewhat short of expectations.

SPREADING EQUITY CULTURE

With the view to increase penetration of equity culture and to bring a fresh set of retail investors into the stock market, the Budget proposed Rajiv Gandhi Equity Savings Scheme. This scheme applies only to first-time investors with less than Rs 10 lakh income. 50 per cent deduction can now be availed for direct investment up to Rs 50,000 in stocks by these investors.

While there is no doubt that the equity culture in India needs to spread, drawing novice investors into direct equity investing does not appear prudent. These investors are better off using the professionally managed mutual funds to invest into the stock market. The tax sops could lure one segment of the population but there is a vast majority that steers clear of equities due to the inherent risk and prefers the safety of bank deposits or bonds. Such investors might not be enticed by the one-time tax concession.

SECURITIES TRANSACTION TAX

Stock exchanges and market intermediaries have been crying hoarse over declining trading volumes in the market. The Finance Minister has tried to address this issue by reducing securities transaction tax (STT) on delivery-based transactions by 20 per cent.

This token reduction will not have any effect on the transaction cost of either investors or traders. For one, investors who take delivery generally hold on for longer periods to play for larger profits. They are, therefore, scarcely impacted by the incidence of STT. Two, despite the reduction, STT will account for over 35 per cent of the total transaction cost on delivery-based trades.

The Finance Minister has also ignored the STT on derivative transactions. The derivative segment contributes over 80 per cent to the overall volumes on the exchanges. It is this segment that contributes to liquidity and aids price discovery.

FII TAXATION

Pranab Da made it quite clear in his speech that the government is not going to tolerate black money. He has promised a white paper on black money soon. Some of the proposals in the Budget are targeted towards funds stashed abroad finding their way back into the stock market.

A popular route taken by money launderers into stock market is through the off-shore tax haven, Mauritius. The Mauritian government issues tax residency certificates (TRC) to offshore companies that helps them avail of the benefits under double taxation avoidance agreement signed by the Indian and Mauritian governments.

The rules for obtaining the TRC are quite light on a company. They only require two resident directors, the board of directors' meeting to be chaired at Mauritius, maintaining accounting records at a registered office in the country and channelling all banking transactions though a Mauritian bank account. There is no doubt such regulations enable shell companies to invest into India.

The Budget lays down that “submission of Tax Residency Certificate is necessary but not sufficient for availing benefits under these treaties.” This means that tax authorities now have the power to overlook the tax residency certificate and demand further proof of commercial substance.

The Budget has also included General Anti-Avoidance Rule (GAAR) in the Income Tax Act. Tax authorities will now impose GAAR on arrangements that “lack commercial substance” or are carried out in a manner that is normally not employed for bonafide purpose. The Budget document goes on to say that an arrangement will be deemed to lack commercial substance if it includes “round trip financing”.

Both the change in TRC rules and implementation of GAAR mean that illegitimate funds flowing into stock market through the Mauritius route will now face greater deterrents. The tax-men now have the power to ask for further proof of commercial substance, investigate the source of these funds or deny tax benefits to such arrangements.