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The number of individuals who filed for short-term capital gains or losses was only 5.9 lakh in fiscal 2012, according to income-tax department data. Photo: Hemant Mishra/Mint
The number of individuals who filed for short-term capital gains or losses was only 5.9 lakh in fiscal 2012, according to income-tax department data. Photo: Hemant Mishra/Mint

India’s stock-market traders missing from tax data

The maximum number of tax filers who could have reported any short-term capital gains or losses is 20.15 lakh, which is only a tenth of the total number of demat accounts

Mumbai: Where are the jobbers, scalpers and short-term traders in India’s stock markets?

The number of individuals who filed for short-term capital gains or losses was only 5.9 lakh in financial year 2012, according to income-tax (I-T) department data. That’s a fraction of the 2 crore demat accounts that were in operation that year. So either there is a lot of under-reporting by stock traders or they are holding on to their investments for more than a year.

Traders—typically people who hope to profit by taking short-term calls on the stock market—have to pay 15% of their profit as short-term capital gains tax if they sell a listed security within a year of buying it. This levy also applies to sale of gold, silver and immovable property. This also means that the actual number of stock traders who filed tax records would be lower than 5.9 lakh since the figure also includes those who incurred short-term gains through sale of gold, land and other property. Overall, 2.8 crore individuals filed I-T returns for 2011-12.

One explanation for the 5.9 lakh number could have been that the short-term gains of a particular year were set off against losses carried forward from earlier years. But then only 11.88 lakh individuals have filings which show that they had some losses to set off against their short-term gains.

Let’s assume that each of these had a carry-forward loss, which was equal to their gains for the year for which tax returns were filed, that is, they could show zero capital gains. This means that the maximum number of individuals with short-term gains or losses would be 17.78 lakh. (11.88 lakh + 5.9 lakh).

A similar exercise for all taxpayers (which would include firms, Hindu undivided families, etc) throws up another 2.37 lakh with a tax record of such transactions.

So the total maximum number of tax filers who could have reported any short-term capital gains (or losses) is 20.15 lakh. That still makes up only a tenth of the total number of demat accounts.

To be sure, not all demat accounts are actively operated. But the number still appears short.

A July 2011 National Council of Applied Economic Research (NCAER) survey sponsored by the Securities and Exchange Board of India put the number of investors in the secondary market at 52.8 lakh. Data from the National Stock Exchange shows 42.88 lakh active clients during FY14. An active trader is one who has traded at least once during the year.

“If there is a short-term gain amount (irrespective of the amount involved), the same needs to be offered to tax/reported in the tax return. Non-disclosure of income is definitely violation of tax norms," said Amarpal Chadha, partner and India mobility leader, EY.

The only other explanation is that the majority of tax-paying entities don’t trade in the market (and are purely long-term investors) or the combined source of all their incomes is below the minimum limit at which they have to pay taxes.

A September 2011 Morgan Stanley report did note that the average holding period of investors (this would include all categories, including domestic and foreign institutions) stood at around 35 months then.

Under-reporting could be another reason, though stock market transactions are generally easier to track than transactions in gold or real estate.

Neelesh Khandelwal, partner, direct tax, BDO India, pointed out that tax officers often focus on high value transactions. Also many people have multiple bank accounts, some of which are not reported in their tax returns. This made it easier for smaller value transactions to slip through the radar.

The situation has changed as systems have become more integrated over the last few years. Tax authorities can now leverage technology to send notices for smaller discrepancies too. Trying to avoid scrutiny is difficult today and penalties can involve 300% of the tax payable, with penal interest and possible prosecution.

“It is very high risk," Khandelwal said.

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