The Telegraph
Since 1st March, 1999
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PC reboots on tax programme
Brokers offered two-way tradeoff

New Delhi, July 12: Finance minister P. Chidambaram today said he was prepared to take a fresh look at the controversial transaction tax which has sent markets into a state of torpor with very low trading volumes since the announcement was made in the Union budget last Thursday.

“We must admit that transaction tax is efficient, neat, non-regressive, eliminates tax avoidance and everybody contributes to the exchequer... But I am prepared to take another look at the numbers,” he told industrialists at two post-budget meetings organised by the Federation of Indian Chambers of Commerce and Industry (Ficci) and the Confederation of Indian Industry (CII).

Chidambaram was firm that the transaction tax was here to stay and said he was prepared to tinker with the rates on long-term and short-term capital gains and the transaction tax “if someone could come up with a better set of numbers”.

“The transaction tax has received more criticism than it deserves,” he said even as he sought industry support for a tax that is levied in 25 other countries.

“We worked with a set of numbers — zero for long-term capital gains, 10 per cent for short-term capital gains and 0.15 per cent for the transaction tax,” the finance minister said. “If the industry and brokers have a better set of numbers, then I am prepared to look at them.”

“The numbers could be zero, 10 and 0.15 or zero, 15 and 0.10 per cent,” he said, adding he would seek support from everybody for the long-term benefit of the capital markets.

Chidambaram is due to meet representatives from the capital markets tomorrow to discuss the contentious tax issue even as he said it had been imposed because the stockbroking fraternity had demanded it in the first place.

The finance ministry admitted that there appeared to be some merit in the argument put forward by mutual funds that the imposition of a transaction tax would wipe them out because of the wafer-thin spreads in their business.

“We can certainly fine-tune it,” he added.

Mutual fund experts have been appalled by the universality of the application of the transaction tax which, they argue, encourages investors to go to the stock market directly rather than go through them.

“We judged that the complex capital gains tax regime was distorting the market and encouraging tax avoidance. The transaction tax would be beneficial in the long-run,” Chidambaram said.

Even in the bond market, which was stunned by the levy, there are growing fears that the additional cost arising from the turnover tax would leave no returns.

Of the 25 countries that have experimented with the transaction tax, five have already jettisoned it: Japan, Singapore, Ireland, Sweden and Denmark.

Chidambaram said several countries had a higher transaction tax than the one proposed in his budget and, while he was prepared to discuss a rejig of the rate, he was convinced of the justification for the transaction tax.

Most countries use the transaction tax to tamp down on speculation and see in it a good revenue-raising measure.

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