New Direct Taxes Code and a Stock Market Selling off….What’s the Connection ?

Right from August 12,2009 when our FM,Pranab Mukherjee released the New Direct Taxes Code for Discussion,there has been developing apprehension on increased taxation on Capital Gains

I’ve been warning Clients about the  Market Selling off towards 2011 as Investors book Gains,both short and long term, to take advantage of lower tax rate and tax exemption respectively……and today Shanbag has written an article in DNA on this potential selloff

Even FIIs may cry off as they may lose advantage of any  Double Taxation Treaty between their domiciled base and India

The New Direct Taxes Code is planned to be in force from April 1,2011

Some of the sailient features relating to Capital gains are as below

• Income from Transactions in ALL Investment Assets,except for personal effects and agricultural land, will be classified under Capital Gains and taxed under this head
• All Gains and Loss have to be included in the Total Income in the Financial Year in which the Transfer of the Asset takes place,irrespective of when the Consideration is received
• The distinction between Short Term and Long Term Gains and Loss is eliminated
• Securities Transaction Tax to be abolished
• Base Date for determining Cost of Acquisition for the purpose of computing Capital gains or Loss is shifted from April 1,1981 to April 1,2000
• Indexation benefit will be allowed for those assets that are transferred after one year from the end of the Financial Year in which they were acquired….this is a very important point,as it makes a distinction between the earlier one year from the date of acquisition……thus if an asset was acquired in May 2010,you will get the benefit of Indexation only if you transfer this asset post March 2012 and not post April 2011 

If the above clauses are not favourably altered or modified after discussion,then expect heavy selling in Stocks towards 2011 or even before if our Sensex crosses 20000….because,if Investors do not sell before April 2011,all their gains,when they actually do sell,will be taxed higher….High Networth Individuals will see a straight 30% tax on gains,which otherwise would have attracted no tax if long term or lower tax if short term and if sold of by March 2011

Something to think about and act….something to look forward to…rather not look forward to !