Finance Minister Jaswant Singh's move to restrict the exemption on long term capital gains tax only to the BSE-500 stocks has the markets upset.

The special rate of tax is 10 per cent plus surcharge in the case of listed securities (defined in section 2 of the Securities Contracts Regulation Act, 1956, and listed in a recognised stock exchanges in India) whereas the same was 20 per cent in the case of unlisted securities under section 112 of the Income Tax Act, 1961.

"It means that now onwards instead of two classes of securities, three classes have been created for the purpose of long term capital gains," said Kishore P Ostwal, a leading Mumbai-based tax practitioner.

In one class, the scrips listed in BSE-500 are totally exempt under Section 10(36). In the second fall the scrips listed on the National Stock Exchange or BSE or any other recognised stock exchange but not in the BSE 500, where the applicable rate of tax will be 10 per cent plus surcharge (before indexation) or 20 per cent (after indexation) and the third class will contain unlisted securities which will continue to attract a 20 per cent tax.

This is in view of the fact that though the proposed exemption under Section 10 (36) has been amended but not the section 112.

"So far, the tax laws have identified only listed and unlisted securities. But now the income tax assessee and the revenue department will have to prepare themselves to identify whether the stock is listed as a BSE-500 stock or not," another tax consultant added.

In fact, this is against the very purpose of simplification. "To book a few guilty persons, the government is punishing the innocent also," a broker said.

Tax experts feel that a new front of litigation has been opened up by the government. Simultaneously, it has given powers to the BSE to decide the fate of the investors while giving a stepmotherly treatment to the National Stock Exchange and other recognised stock exchanges.

"Discrimination breeds litigation and there is every likelihood that these issues will be tested in the courts of law as promoters and investors of companies listed in regional stock exchanges will be largely affected," Ostwal added.

In fact, by this discrimination, government is sending signals to invest only in BSE 500 scrips even though the total number of securities listed exceeds 6,500.