After more than seven-and-a-half years of Central Board of Direct Taxes’ (CBDT) circular, which sought to differentiate cash market earnings as business income and capital gains, there is still no clarity on the subject.

The circular, issued in June 2007, had said that purchase and sale of shares with the motive of earning a profit would result in the transaction being in the nature of trade and earnings would be considered as business income. Meanwhile, where the objective of investment is to derive income by way of dividend, the profits will be considered as capital gains.

Experts highlight practical problems with this provision. “The underlying issue is of characterisation of income and the applicable tax rate.  In absence of any clear measurable parameters, each case is determined based on facts and circumstances of a particular case.  Even though the intention of the tax payer at the time of making the investment should be the guiding factor, however, practically it becomes difficult to substantiate the same with the underlying documentation,” said Vikas Vasal, partner-tax, KPMG.

The circular had stated that the officer should look at the substantial nature of transactions, the manner of maintaining books of accounts and the magnitude of purchases and sales to determine whether the transactions are in the nature of trade or investment.

Under current rules, business income is taxed at 30%, while capital gains are taxed at 15% when shares are bought and sold in less than year. The long-term capital gains are exempted from any tax. (Financial Express)