BSE BROKERS FORUM was formed in 1993 with the objective to highlight the concerns of the member brokers to Regulators and Government. Currently we have around 850 members including equity, commodity segment. The main objective of the FORUM is to work for the development of the capital markets in general and member brokers in particular.
1. Representation to Regulators:- FORUM does lot of representations to the SEBI, MoF and stock exchanges regarding the problems faced by the member brokers. FORUM does this in the form of written correspondence, one to one meet with officials and explains them.
2. Seminars for member brokers:- Every month FORUM does seminars on the themes which affect the member brokers like Compliance, E Boss, PMLA, FATCA, KRA to name a few. FORUM did seminar on Compliance at places like Delhi, Kolkatta where even SEBI observers were also present.
3. Investor Awareness programmes:- Every month around 10 seminars on Investor Awareness is done by FORUM by visiting schools, B schools, Colleges around the country. In last two years FORUM has conducted 345 Investor Awareness Programmes Pan India. This is very important to bring new retail investors to the market and develop the equity cult in the young generation. 4. Global Connect Tour:- Last year FORUM took the group of member brokers to international
markets to have understanding of the best global practices.
5. Member Grievances:- The FORUM is actively working for solving the grievances of the members. All the efforts are by FORUM in form of drafting letters to regulators, meeting with exchange officials to solve the member related issues.
INDEX
Sr. No. Particulars Page no
DIRECT TAX 1. Restoration of Rebate under Sec 88E 2. Explanation to Section 73
3. Section 44AB
4. Section 14A rule 8(D): 5. Section 194H
6. Reduce Dividend Distribution Tax
OTHERS 7. Early Education and Financial Inclusion 8. Stock Broking as “Industry Status” 9. AIR Reporting
SUMMARY OF THE REPRESENTATIONS
DIRECT TAX
1. Restoration of Rebate under Sec 88E : This would result into government continuing to get STT and at the same time the burden of tax being reduced on the investors.
2. Explanation to Section 73: Securities Transactions of Corporate entities treated as ‘Speculation’ which is creating complications. As now a days many corporates are accessing stock market either as off season cash management tool or as strategic/portfolio investments. Their participation in market is as vital as any other investor. Also, this proviso was introduce way back in 1977, lot has been changed since than in terms of surveillance and those circumstance no more exists. Hence, it is suggested to remove this proviso or amend it suitably.
3. Section 44AB: Requires audit of accounts if turnover exceeds 1 crore and Section 44AD Requires audit of account if turnover is below 1 crore and income is lower than 8% of turnover. As the size, volumes and paying profile of this market is completely different than other traditional markets, it is suggested to exempt securities transactions from this provision to save thousands of small investors from hardship of Audit because complete record of securities transactions is available with various authorities in electronic form and including I.T.deptt. and any officer can verify it at the click of button.
4. Section 14A rule 8(D): ): Disallow disproportionate expenses on presumptive basis against dividend income which substantially reduce the benefit of exemption given to dividend. Sometimes the disallowance are higher than the dividend income itself. Therefore, it is suggested to exclude dividend income from this provision.
5. Section 194H: Exemption to Commodities Transaction Brokerage from TDS is required on the line of Securities Transaction Brokerage as which is already given.
6. Reduce Dividend Distribution Tax: The dividend distribution tax reduction would help corporate increase their profits and this in turn would result into greater share of dividends for the
investors
Business Income v. Capital Gains : The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :-
"(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;
(ii) the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;
(iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt".
Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade.
But still Assessing officers treat the income as Business Income or Capital Gains as per their wish and Assesses have to prove this so clarity required in Act.
OTHERS
7. Early Education and Financial Inclusion: Educating about capital market right from the high school level to ensure that more of equity culture is developed among the young population.
8. Stock Broking as “Industry Status”: This would ensure that they would have access to bank funding which thus they the stock brokers are able to expand their business in more cities resulting to create more jobs and in turn develop the equity cult in the economy.
9. AIR Reporting : Under AIR reporting, all transactions is securities above a particular threshold form part of AIR and requires explanation to be given to the Assessing Officer. In case of trading, this threshold is too low, and discouraged market participants to trade, So, higher threshold only for delivery base transaction has to be increased. This is for the reason that the threshold limit for the delivery base transactions has to go up so that stock market participants are not harassed.
DETAILED REPRESENTATIONS
DIRECT TAX1. Restoration of Rebate under Sec 88E - As per Sec 88E, Where the total income of an assessee in a previous year includes any income, chargeable under the head "Profits and gains of business or profession", arising from taxable securities transactions, he shall be entitled to a deduction, from the amount of income-tax on such income arising from such transactions, computed in the manner provided in sub-section (2), of an amount equal to the securities transaction tax paid by him in respect of the taxable securities transactions entered into in the course of his business during that previous year.
This rebate is not allowable after AY 2009-10, and now STT paid is allowable expenses from sale and purchase amount for computing capital gain/loss.
In our view section 88 E must be reintroduced so as to give the benefit of rebate which will help small investors a lot.
The argument given earlier by the Department was that there is a lot of misuse of the STT rebate by transferring the benefit to other accounts by the Brokers. The things have changed drastically from then and now. As per the present provisions, SEBI has imposed a severe penalty on the Client Code changing, which has made it almost impossible for any Broker to make any fictitious code changes with malafide intention of transferring the STT benefits.
If the Govt. cannot lower the STT on the ground of revenue loss, the rebate u/s 88 E must be restored ,which will be restricted to tax amount on the profits of dealing in shares.
2. Explanation to Section 73: Securities Transactions of Corporate entities treated as ‘Speculation’ which is creating complications. As now a days many corporates are accessing stock market either as off season cash management tool or as strategic/portfolio investments. Their participation in market is as vital as any other investor. Also, this proviso was introduce way back in 1977, lot has been changed since than in terms of surveillance and those circumstance no more exists. Hence, it is suggested to remove this proviso or amend it suitably.
3. Section 44AB: Requires audit of accounts if turnover exceeds 1 crore and Section 44AD Requires audit of account if turnover is below 1 crore and income is lower than 8% of turnover. As the size, volumes and paying profile of this market is completely different than other traditional markets, it is suggested to exempt securities transactions from this provision to save thousands of small investors from hardship of Audit because complete record of securities transactions is available with various authorities in electronic form and including I.T.deptt. and any officer can verify it at the click of button.
It seems that this may not be the intent of statute to cover all and sundry under audit. Because if this is the case than there would be huge nos. of audit cases and the existing nos. of auditor would fall short. Considers these figures, there are approx 85000 practicing CAs, each one has audit limit of 40 case which comes to 34 lakhs cases. Last year there was 77 lakhs return through ITR4 under 'Business Income' category in e-filing. Physical filing figures are no known. Out of the 2 crs UCC if we assume only 10% falling under this criteria, than there would be another 20 lakhs cases and apart from this there are lakhs of others small businesses in every corner of the country.
4. Section 14A rule 8(D): Disallow disproportionate expenses on presumptive basis against dividend income which substantially reduce the benefit of exemption given to dividend. Sometimes the disallowance are higher than the dividend income itself. Therefore, it is suggested to exclude dividend income from this provision.
5. Section 194H: Exemption to Commodities Transaction Brokerage from TDS is required on the line of Securities Transaction Brokerage as which is already given.
Taxation Issues - Section 73/43D and 14D - As the Law stands today, any small investor who has done a single transaction in derivatives or non-delivery transactions in CM have to get their accounts audited U/s 44AB.
U/s. 44AD, if the income under the head 'Business Income' than either you have to show income above 8% of turnover. If not than justify the lower income through audit u/s 44AB.
We assume very few investors would be taking into account these requirements. But as the follow up for tax compliance is increasing this issue may create problem in future. As all the transactions in stock market is generating trail through STT, department may issue notices to those who's PAN carries such trails without matching records of returns. Such notices were issued en mass during the last year.
Therefore, they can’t afford to ignore filing the Return. If they want to file, they have to get it audited U/s 44AB.
There do not seem to have specific methodology of calculating turnover for our market. However, generally auditors advise to consider it as follow.
In case of F&O and CM non-delivery - sum of daily MtM figures. In case of Delivery - sum of full value of delivery bought and sold.
If it is above Rs. 1 cr than normal audit u/s. 44AB triggers. If it is below Rs. 1 cr than audit u/s. 44AD triggers. So in any case one has got audited u/s. 44AB.
6. Reduce Dividend Distribution Tax: The dividend distribution tax reduction would help the corporate increase their profits and this in turn would result into greater share of dividends for the investors.
Business Income v. Capital Gains
The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :-
"(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;
(ii) the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;
(iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt".
Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade.
But still Assessing officers treat the income as Business Income or Capital Gains as per their wish and Assesses have to prove this so clarity required in Act.
OTHERS
7. Early Education and Financial Inclusion:- There is lack of knowledge and lack of awareness about the working of the capital market. There are lot of mis-perception that it is gambling and not investment. This can be reduced by inculcating right kind of knowledge about potential wealth creation in the capital market. Specific courses on capital market, stock market should be introduced at the higher secondary level which would give the young students a correct perspective and also create an interest in the wealth creation aspect of capital market. For instance in South Korea, the Mirae Asset Management had started teaching the concepts of SIP from the school level.
In a country where population is large as ours, the investing population is extremely small. One of the ways in which these numbers can be increased is through focuses financial inclusion and confidence building measures among local investors.
We suggest that this measures will play a major role in the getting the retail investors back to the equity market.
8. Stock Broking as “Industry Status” ”:- Indian capital market infrastructure is one of the biggest in the world in terms of intermediaries which are backbone for any industry development. Indian broking industries has more than 1400 brokers in BSE and NSE and more than 50,000 registered sub brokers providing employment to 10 lakh people in the economy. The brokers are spread pan India right from Kashmir to Kanyakumari. The stock broking fraternity once given “Industry Status” would ensure that they would have access to bank funding which would ensure that they are able to expand their business in more cities. This would create more job creation and in turn would develop the equity cult in the economy.
9. AIR Reporting : Under AIR reporting, all transactions is securities above a particular threshold form part of AIR and requires explanation to be given to the Assessing Officer. The current limit of Rs. 2 lakh is very less considering the nature of securities market. We suggest that the limit should be increased to Rs. 25 lakhs. In case of trading, this threshold is too low, and discouraged market participants to trade, So, higher threshold only for delivery base transaction has to be increased.
