What's the mystery around 97.8% filers recording zero STCG tax in 2016-17?

Number of those reporting such gains are a fraction of investor count from other sources

The latest set of tax data reveals a persistent oddity when it comes to short-term capital gains tax.

Around 97.8 per cent of them recorded zero short-term capital gains tax in the financial year 2016-17. The 1.1 million who have recorded any short-term capital gains tax account for only around one-sixth of active clients, and one-tenth of the demat accounts in existence at the time.  

This is in spite of rising markets in the year under question. The stock market barometer, the S&P BSE Sensex rose 16.9 per cent in 2016-17.

Interestingly, short-term capital gains tax also extends to other asset classes like real estate and gold. That implies the number of those with stock market trading would actually be fewer than what the headline figure suggests.

The tax data for 2016-17 shows that there are 49.9 million tax filers in the country. The number of those recording non-zero short-term capital gains is only 1.1 million. The number of active clients according to data from the National Stock Exchange is 5.95 million. The total number of demat accounts in existence at the end of 2016-17 was 27.9 million.  

Investors can also set off earlier years’ losses against the gains of the current year which could contribute to lessening the number of people having to record short-term gains. The total number of entities who have set off losses in this fashion is 1.7 million. The sum of these two figures is still a fraction of the total accounts and active clients. This is assuming that each of these managed to exactly set off their gains against past losses, which would be unusual.

Similar gaps were seen in previous years as well.

Another possible explanation could be that traders sometimes classify their stock market activity as business income. This is not a likely explanation according to experts.

“People don’t generally file it as business income because it invites a higher rate of taxation. Business income can be taxed at 30 per cent or more compared to 15 per cent for short-term capital gains tax. People are unlikely to report it as business income in large numbers especially when taxation would be so much higher,” said one tax expert with an accounting firm.

“I don’t think people will be filing it as business income because reporting under capital gain is so much more beneficial,” said another tax expert. He added that increasing mutual fund investments, and a longer-term focus among investors could be among the reasons for the low filings.

“It could also be that short-term capital gains are not being fully reported,” he said.

The possibility of the majority of demat account holders being long-term investors seems remote.

The average holding period for investors was only 24 days according to the data compiled as part of a November 2011 paper entitled ‘Behavioural Biases, Investor Performance, and Wealth Transfers between Investor Groups,’ from authors Sankar De of the Indian School of Business, Kellogg School of Management’s Naveen R Gondhi and the Indira Gandhi Institute of Development Research’s Subrata Sarkar.

Category	Number (in million)
Number of entities noting short-term capital gains	1.11
Number of entities, accounting for possibility of losses being set off	2.83
Number of active investors	5.95
Total number of demat accounts	27.85

Source: Income Tax data, NSE, Sebi