New ways to assess stocks for taxation

Whether delivery of shares have been taken or are kept with the broker, has been suggested as a test to determine whether shares have been purchased for long term investment or for short term trading reasons. A recent Central Board of Direct Taxes CBDT circular has asked tax assessment officers to distinguish between stocks held in trade and otherwise, by an individual or business entity, for taxation purposes.

8220;When an individual or company trades shares and debentures for its main source of income then it is taxable according to normal income tax rates. But when shares are held as held as long term investment, any capital gains on them attract taxes to the tune of 0-20 per cent,8221; says GP Saini, chartered accountant. CII has suggested the above methodology to remove ambiguity on whether shares are being held for short-term trading or long-term investment. Although the circular recognises the need to make such a distinction, it fails to provide an objective methodology and leaves it to the discretion of the officer, which might lead to disputes.

A similar methodology has been suggested for derivatives, where holding the underlying shares along with its derivative, to hedge against risks, may be considered as holdings for business profits while holding the derivative alone may be considered as holdings for speculative reasons. For the purposes of tax payment, it has also been suggested that stock in trade be marked in the books at face value or market value whichever is lower and stocks held as long term investments be marked at market value.