CBDT lays out norms for stock gains

16 June 2007

New Delhi: The Central Board of Direct Taxes (CBDT) has directed tax assessing officials to calculate tax liability on those transacting in shares on the basis of principles laid down by the Authority of Advance Rulings (AAR).

These principles distinguish between shares held as stock-in-trade (trading assets) and those held as investments.

The clarification is important as income from trading assets is treated as business income, attracting a tax of slightly over 30 per cent. Income from investments attracts capital gains tax - 10 per cent for short-term (less than twelve months) and no tax on long-term gains.

The circular implies that tax assessing officers will henceforth have to look into the holding pattern of the securities bought and sold, the
sale-purchase ratio, the time involved, the funding sources and the overall trade volume when determining the tax liability involved among others.

The circular, which supplements an 18-year old one, provides clarity on a controversial issue that has seen massive litigation by many including FIIs.

The circular directs assessing officers to three principles culled out by AAR from Supreme Court decisions for determining tax liability. AAR has said ordinarily, the purchase and sale of shares with a motive of earning profits amounts to business income, while investments made for earning income through dividend may be treated as capital gains.