InvestorQ : Has the CBDT really defined “Significant Trading Activity”, as it is otherwise open to legal disputes and misinterpretation?
Nisha Chandani made post

Has the CBDT really defined “Significant Trading Activity”, as it is otherwise open to legal disputes and misinterpretation?

1 year ago

While the definition of Significant Trading Activity (STA) is still open to discretion, the CBDT has indicated some broad rules that will be used for this classification. The decision boils down to whether short term equity holdings are to be classified as Investments or as Stock-in-Trade. Here are some such broad rules that are indicative of the same and the CBDT stance is actually a lot more clear in case of STCG than in the case of LTCG where there is a good deal of discretion given to the assessee filing returns.

Firstly, the volume of equity trading during a particular period is taken as a proxy for this classification. While there are no hard and fast cut-offs, some online brokers do advise traders to classify as business income if the trading volumes in a particular fiscal year exceed Rs.1 crore. Turnover refers to the value of the trade based on actual value in case of delivery and intraday trades.

Secondly, the ratio of purchases to sale is also a consideration. If the purchases and sales of shares are of similar magnitude it is typical of a trader and must be classified as business income. If the person shows greater proclivity to buy and hold it is more a sign of an investor.

Thirdly, the average period can be a good proxy for this classification. Normally if your average holding period is shorter then it is more likely to be business income rather than classified as capital gains. That is why if your trading activity is focused largely on intraday trading, futures and options trading then it is always more advisable to show as business income rather than as capital gains. In fact, activity in the F&O segment is also an indicator of whether the income from shares should b classified as capital gains or business income. A trader being more active in F&O is a sign of a shorter time frame and a greater intent to trade.

Last but not the least, It needs to be clarified that just the existence of share trading as an activity in your business memorandum of understanding (MOU) and the articles of association (AOA) is not necessarily a criterion for classification. As a tax assessee you can maintain two separate portfolios; one as a long term capital asset and one as stock-in-trade. That is perfectly legitimate as long as you account for them properly. Understanding this distinction can go a long way in helping you plan your portfolio better!