M A I N   N E W S

Tax scare leaves Sensex swinging
Shiv Kumar
Tribune News Service

Mumbai, May 22
Media reports about the Income Tax Department out to levy maximum taxes on the broking community sent the bourses on a wild swing today resulting trading to be suspended by an hour at noon.

With the bulls out to correct last week’s downtrend, the markets opened 133 points higher at 11,072 and touched 11,143 before a clumsily worded reaction from the Central Board of Direct Taxes (CBDT) to the media reports regarding taxes on the broking community sent the markets into a tailspin.

The CBDT denied reports that a draft circular issued by it regarding taxation on the sale of stocks was ambiguous. While denying that FIIs would be denied the benefits of long-term capital gains, the CBDT went on to criticise the publication for stating that “investors would have to live at the mercy of the tax officials”.

However, a subsequent paragraph in the statement about the taxman’s discretionary powers in making a distinction between a trader and an investor at the time of Income Tax assessment caused panic in the exchanges. “Whether a person purchasing and selling shares or securities is a trader or an investor remains a question of fact. The assessing officer would have to take note of the totality of the facts and circumstances before reaching a conclusion,” the statement said.

The broking community took this to mean that full-time traders would be at the mercy of the assessing officer who may easily choose to deny the benefits of long-term capital gains to them. The sentiment quickly turned bearish and the markets took a hammering.

There was further panic as rumours spread of many brokers not being able to honour their payments following the bear hammering of last week.

Shortly before noon, the Sensex crashed by 1,112 points to touch 9,827. The Nifty too tumbled 350 points at 2,896. With the 10 per cent circuit breaker being reached trading on the bourses was suspended for an hour.

By then Finance Minister Palaniappan Chidambaram and Sebi chief M. Damodaran had moved in to assure investors that their interests would not be affected. Assuring investors that there was nothing amiss and he would take all steps to avert liquidity, Mr Chidambaram went out of the way to pacify the market even though his ministry said selling spree by brokers possibly led to pressures and then a market crash. The minister even promised that banks would lend money to brokers to tide over the sudden payment crisis they would have to face following the crash.

Mr Damodaran went on to assure the markets that there were no systemic problems and the markets were healthy. This did have a soothing effect and the markets rose by 600 points to close at 10,482 points, 457 below the previous closing. The Nifty lost 166 points to close at 3,081.

The biggest losers were Tata Motors down 8.12 per cent at Rs 780 while Larsen & Toubro was down 6 per cent to close at Rs 2,350. Wipro was down 8.3 per cent to close at Rs 450.