Revised tax data that seeks to clarify the number traders in the stock market actually raises more questions than it answers.
There were 590,000 individuals who recorded short-term capital gains or losses during FY12, according to the previous tax data released in April. The maximum number of all trading entities (individuals and others) came to 2.014 million, adjusting for the possibility that some may have netted off their gains against previous losses.
This is less than half of the exchange figure of 4.288 million active investors for the year. It is a small proportion of the 20 million demat accounts which are required for trading in the stock market.
The tax department has since cleaned up the data. But the revised numbers now show only 429,000 individuals who had either short-term capital gains or losses. The maximum number of entities (individuals and otherwise) who recorded short-term gains or losses is now 1.809 million. The number of traders is down 204,889.
Other explanations for the low numbers could be that the majority of investors are long-term or that they make so little income from trading that they don’t fall in the taxable bracket at all.
It could also be that some of them might be classifying their gains as business income though this could entail a higher rate of taxation. Short-term capital gains are taxed at 15%. Business income can be taxed at a rate in excess of 30%.
“One would expect that the vast majority would be classifying their trading activity as capital gains rather than business income,” said Rajesh H. Gandhi, partner, Deloitte Haskins and Sells.
So while firms or individuals forced to classify it as business income because of the nature of their trading (such as having a large volume of transactions) may increase it incrementally, it is not expected to add significantly to the numbers. The other explanations — that they make so little money that they don’t fall into the tax bracket or that most investors locking their money away for the long-term -- also seem counter-intuitive.
One must consider that the tax department’s figure on short-term capital gains or losses is not restricted to share transactions. It also includes those involving gold, land and property. So the number involved in share transactions is actually lower than the headline figure would show.
Accounting for those setting off carry-forward losses results in a much larger figure than looking at the one based purely on capital gains. This, however, assumes that everyone who had a loss was able to use it to entirely set off gains, an unlikely scenario.
Amarpal Chadha, mobility leader, people advisory services, EY India, also said that among the various reasons that could have contributed, one could be non-disclosure of short term capital gain/loss.
It may be difficult to say with certainty that something is off, given the lack of granularity in the data. But a slew of tax evasion activities involving the stock market have previously been reported. This includes using the exchange platform to evade taxes and launder money .
A closer look at tax data may be warranted.