Yes, a company can treat its shares trading as a business. This is a common practice, particularly for firms that actively trade securities with the intent of making a profit from short-term price fluctuations, rather than holding them for long-term investment.

The classification of trading activity as a business or an investment depends on factors such as the frequency, volume, and purpose of the trades. For tax purposes in India, this distinction is crucial and has different implications under Income Tax, GST, and TDS.

Income Tax

This is where the most significant differences are seen. Classifying share trading as a business or capital gains has distinct advantages and disadvantages.

Benefits of Business Income

• Deductible Expenses: The company can deduct all expenses incurred for the purpose of the trading business. This includes brokerage fees, transaction charges, demat charges, internet bills, subscription fees for trading software, and even a portion of rent and electricity if a dedicated office space is used.
• Set-off and Carry Forward of Losses: Business losses from trading can be set off against other business income. If the losses cannot be fully set off in the same year, they can be carried forward for up to eight subsequent years to be set off against future business profits. This is a significant advantage, especially in a volatile market.
• No Tax on Long-Term Capital Gains (LTCG): Since all trading is classified as business activity, there’s no distinction between short-term and long-term capital gains, so the tax on LTCG doesn’t apply.

Demerits of Business Income

• Higher Tax Rate: Business income is taxed at the company’s slab rates, which may be higher than the concessional rates for capital gains. For example, short-term capital gains on listed shares are taxed at a flat 15% (under Section 111A), while long-term capital gains above ₹1 lakh are taxed at 10% (under Section 112A). A company’s business income is taxed at the regular corporate tax rate.
• Mandatory Audit: If a company’s trading turnover exceeds certain limits (e.g., ₹10 crore if more than 95% of transactions are digital, otherwise ₹2 crore), a tax audit is mandatory, adding to compliance costs. Also, if there’s a loss or the profit is less than 6% of the turnover, a tax audit is required.
• Compliance Burden: The company needs to maintain proper books of accounts and file the appropriate Income Tax Return (ITR-3) for “Profits and Gains from Business or Profession,” which is more complex than the ITR for capital gains (ITR-2).

GST (Goods and Services Tax)

The implications of GST are simpler because securities are specifically excluded from the definition of “goods” and “services” under the GST Act.

Benefits

• No GST on Transaction Value: The value of the shares traded is not subject to GST. Therefore, even if a company has a very high trading turnover, it doesn’t need to pay GST on that turnover. This means no GST is applicable on the sale or purchase of shares.

Demerits

• No Input Tax Credit (ITC): Since the company is not making a taxable “supply” of goods or services, it generally cannot claim input tax credit on the GST paid on its business expenses (like brokerage fees, software subscriptions, or professional fees) that are directly related to its trading activity.

TDS (Tax Deducted at Source)

TDS provisions apply to various payments, but generally, there’s no TDS on the sale or purchase of shares on a recognized stock exchange.

Benefits

• No TDS Liability: As a company trading shares, you are not required to deduct TDS on the payments made for buying shares.
• Brokerage Payments: While the company doesn’t deduct TDS on the share value, it’s important to note that TDS provisions under Section 194H may apply to brokerage paid to a broker if it exceeds the specified threshold. However, this is a procedural requirement that is generally handled by the company’s accounting department and isn’t a demerit of the trading business itself.

Demerits

• TDS on Dividends and Interest: The company may be subject to TDS on income it receives, such as dividends (if applicable) or interest from its investments, as per the relevant sections of the Income Tax Act. However, this is a standard tax deduction and isn’t a direct demerit of a trading business per se.