The Tax Commission on Tuesday drafted a basic position paper on securities tax reform, including a plan to abolish the withholding tax option on capital gains.

The report is intended to clarify its basic position on securities tax reform before an extraordinary Diet session convenes next week. Securities tax revisions are expected to become a major topic of upcoming Diet discussion.

The tax panel primarily focused on moving the abolition of the withholding tax option forward. It is set to be scrapped in March 2003.

In the current two-tier capital gains tax system, taxes on stock trades are paid either as a 1.05 percent withholding tax on individual sales of shares, whether sold for a profit or a loss, or optionally as a 26 percent tax on total gains for the year.

The issue of when to scrap the withholding tax option has been debated in tax panels from the government and the ruling Liberal Democratic Party. Since the option is more popular among individual stock investors, scrapping it could dampen stock trading further.

The report says that after the withholding tax option is scrapped, steps should be taken to lower the capital gains tax rate, to let stock investors carry over trading losses and to abolish the current tax exemption for capital gains of up to 1 million yen.

It also proposed that the capital gains tax rate reported in annual income tax returns be lowered to 20 percent.

The government report was compiled at a meeting of the tax panel's subcommittee on financial affairs. , chaired by University of Tokyo professor Masahiro Okuno.

Okuno told a news conference that the abolishment should take place as early as in January next year, although he said this would be rather difficult due to technical problems. Other options include next April and January 2002, he said.