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Indian tax authorities are not willing to concede the request of market regulator Securities and Exchange Board of India (Sebi) to provide one-time tax exemption to trading members of stock and commodity exchanges to do both businesses under one entity.
According to a tax official, such consideration could peg loss to the exchequer in a scenario when India is already grappling with revenue shortfall due to steps taken by the government such as the implementation of goods and services tax and demonetisation. Currently, the government is evaluating exemption on long-term capital gains tax which has now been withdrawn to minimise economic distortions and curb erosion of tax base.
Tax implications is a major hurdle for brokers to opt for unified licence regime. The change was notified in July 2017, by amending the Securities Contracts (Regulation) Rules and Sebi (Stock brokers and Sub-Brokers) (Amendment) Regulations. Since then not a single broking firms have executed the concept.
Sources say, brokers had made several representations and requested market regulator to grant tax exemption. “The issue has been raised in the recent meeting where brokerage houses expressed their apprehensions on having a single entity. According to them, to adopt the concept they have to either acquire the entity or merge their subsidiaries. If they acquire the commodity segment or vice versa, they have to shift their client base accordingly. While, if they follow merger process they are bound to pay capital gains tax and stamp duty as the underlying assets, including securities and fixed assets, will undergo a change in ownership.
Currently, most brokerages have separate arms for equities and commodity derivatives trading.
Explaining the reason, a broker said, transfer of securities held for less than a year into the merged entity will attract short-term capital gains tax of 15 per cent.
Any profit arising from the transfer of an asset or change in ownership will also face capital gains tax. Fixed assets owned for more than two years will attract 20 per cent capital gains tax adjusted for cost inflation. If the fixed assets are owned for less than two years, the gains will be treated as income of the individual or company. Besides, brokerages will also be subject to stamp duty during new registration, the amount of which will be decided according to the state laws, he added.
To keep it simple and viable, the trading members are contemplating surrendering the existing license and go for a fresh application rather transferring the assets or follow the lengthy procedures,” said a member, broker forum privy to the development.
As per the Sebi guidelines, a one-time certificate of registration as stock broker/clearing member shall be granted by the regulator.
Subsequent permission to act as a stockbroker or clearing member of other exchanges or clearing corporations shall be granted by the respective bourse or clearing corporation, after scrutiny. Sebi's prior approval will be required by the broker only in cases where an integration would lead to change in control of the stock broker/clearing member.
Following Sebi rules, National Stock Exchange (NSE) had also issued a circular to brokerages which explained the process of filing an application to get the unified licence number. “A few application has come but its awaiting approval due to the compliance issue, said another person in know.
To provide better synergies, Sebi plans to have common intermediaries for both segments. To begin with, the regulator has proposed common brokers. It had also proposed universal exchange which would benefit the NSE, the BSE, and the Multi Commodity Exchange (MCX), which currently trade in either of the two categories. Quick Glance
- Sebi notified unified licence regime in July 2017
- Regulator had put out guidelines in Sep 2017
- No migration happened under the new regime
- Brokerages have expressed apprehension over tax implications
- Brokers might surrender the existing license and go for a fresh application
- Transferring the assets or merger of the subsidiaries would follow the lengthy procedures