The Income Tax department is learnt to have sent notices to over a dozen proprietary stock trading firms and corporate investors, for alleged ‘under-reporting’ of taxable income for assessment years 2006-07 and 2007-08 .
The notices have been sent to entities which availed of the rebate against securities transaction tax (STT) to reduce their tax liabilities to zero or pay very low taxes. The broking firms have been asked to pay the difference with an interest rate of 12%. Three broking firms, which received the notice confirmed the development to ET. An official at the I-T department too confirmed that the notices were sent, and many more are in the pipeline.
“Brokers have been asked to pay MAT, where the liability will be 15% of the book profit. It is applicable when you are showing a loss or your net profit is less than book profit,” said an I-T official, adding the notices were part of the reassessment exercise under which the earlier years’ IT returns filings are randomly scrutinised to check for compliance with applicable rules. The move has rattled the large proprietary trading firms as they fear huge claims from the I-T department in the coming days.
“The demand has been raised under section 271 (1) C of the I-T Act, relating to concealment of income,” said the chartered accountant of a broking firm that received the notice, adding, “The dispute here is about the calculation of tax, and not concealment of income.”
The securities transaction tax was introduced by the then finance minister P Chidambaram in the Union Budget 2004-05. Every share transaction — be it delivery based or non-delivery based — attracted tax. But proprietary trading firms and corporate investors could claim a rebate to the extent of the STT paid, on their business income.
For instance, if a stock trading firm’s tax liability was Rs 20 lakh, and it had already paid Rs 10 lakh as STT, then its net taxable income would be Rs 10 lakh. But there would not be any refund, if the STT paid exceeded the tax payable. For instance, if the tax liability was Rs 10 lakh and the STT paid was Rs 15 lakh, the broker would not get a refund of Rs 5 lakh.
Brokers say that many proprietary trading firms, which generated huge STT, helped corporate investors lower their tax liability, by “selling” them the excess STT for a fee. They did this by transferring some of their trades into the accounts of the corporate investors. That could have been the main reason for the government scrapping the rule allowing brokers to claim a rebate against STT, in the Union Budget 2009-10.