Investing in stock markets to be costly

ISTInvesting in the stock market would become simple but a costly affair, with Finance Minister P Chidambaram proposing measures to tax ESOPs and raise dividend distribution levy.

In a major setback for the market, Chidambaram on Wednesday proposed raising the rate of DDT from 12.5 per cent to 15 per cent on dividends by companies and bringing Employees' Stock Option Plan (ESOP) under Fringe Benefit Tax regime.However, the Minister sought to soothe investors with proposals like allowing delivery-based short selling by institutional investors and making permanent account number (PAN) as the sole identification number for all participants in securities market.

In the Budget for 2007-08, the Minister also proposed to permit individuals to invest in overseas securities through domestic mutual funds.

"In line with measures announced every year to strengthen the market, I propose to make PAN the sole identification number for all participants in the securities market with an alpha-numeric prefix or suffix to distinguish a particular kind of account," he said.

The minister also called for promoting the flow of investment to the infrastructure sector by permitting mutual funds to launch and operate dedicated infrastructure funds.

In another major proposal, the FM proposed to put in place an enabling mechanism to permit Indian companies to unlock a part of their holdings in group companies for meeting their financing requirements by issue of Exchangeable Bonds.

However, the market had virtually no good news on the taxation front.
"I propose to raise the rate of dividend distribution tax from 12.5 per cent to 15 per cent on dividends distributed by companies," Chidambaram said.

Dividends distributed by money market mutual funds and liquid mutual funds enjoy concessional tax rates giving rise to huge arbitrage opportunities, he said, adding, "I propose to address this distortion by raising dividend distribution tax... to 25 per cent for all investors."
In another proposal, which was termed as a major dampener for investors participating in the market through ESOPs given by their employees, he said that these would be brought under FBT net.

Analysts said this proposal would discourage small investors from coming to the market through this route as companies might avoid passing on benefits to employees through ESOPs.