Why in news?
Stock markets have reacted adversely to the proposed Long-Term Capital Gains Tax (LTCG) on securities.
What is a LTCG?
- Any profit from the sale of a capital asset is deemed as ‘capital gains’.
- A capital asset is officially defined as any kind of property held by an assessee, excluding goods held as stock-in-trade, agricultural land and personal effects.
- If an asset is held for less than 36 months, any gain arising from selling it is treated as a short-term capital gain (STCG).
- If an asset is held for 36 months or more, any gain arising from selling it is treated as a ‘long-term’ capital gain (LTCG).
- Shares and equity mutual funds alone enjoy a special dispensation which is, holding period of 12 months or more qualifies as ‘long-term’ in this case.
What is the current scenario?
- Prior to the budget, long-term capital gains arising from the transfer of long-term capital assets, which are held as equity shares is exempt from taxation.
- However, transactions in such long-term capital assets are liable to securities transaction tax (STT).
- This regime is seen as inherently biased against manufacturing and has encouraged diversion of investment to financial assets.
- It has also led to significant erosion in the tax base, which has been further compounded by abusive use of tax arbitrage due ambiguities in exemptions.
What is the new proposal?
- The withdrawal of the exemption to LTCG from April 1, has been proposed in the budget.
- Hence, the long-term capital gains arising from transfer of long-term capital assets like such as shares or share-oriented products, exceeding Rs. 1 lakh will be taxed at a concessional rate of 10%.
- The short-term capital gains tax at 15% will continue for transfer of shares within 1 year.
- The Application - The new tax is applied if the assets are held for a minimum period of 1 year from the date of acquisition.
- Long-term capital gains will be computed by deducting the cost of acquisition from the full value of consideration on transfer of the capital asset.
- The proposed tax applies to the following types of equity capital:
- Equity Shares in a company listed on a recognised stock exchange
- Unit of an equity oriented fund
- Unit of a business trust
- 'Grandfathering' Clause - It is the exemption granted to existing investors or gains made by them before the new tax law comes into force.
- The government said that gains from shares or equity mutual funds made till January 31, will be grandfathered/exempted. There will be no LTCG tax on notional profit in shares till then.
What are the concerns?
- Inflation Indexing - Inflation indexation is a technique to adjust the the cost of acquisition to present level of inflation.
- This will convert the profit earned by transaction of long term capital assets in real terms and safeguards the purchasing power of the public.
- But in the current proposal, Inflation indexation of the cost of acquisition would not be available for computing LTCG tax.
- This has been provided in the proposal and has been subsequently clarified.
- Continuation of STT - The STT is made to continue.
- STT is paid at the time of transaction.
- But it is to be noted that the STT was introduced as an alternative to LTCG tax on equities.
- So retaining STT is a bigger shock for investors.
- Logically there should only be on tax.
Source: Business Standard
