Direct Tax Code: Simplified Capital Gains Tax Regime Proposed – Exclusive
(This is a collaboration with leading tax information portal Taxsutra to publish select in-depth articles on legal and policy matters. This is Part 4 in the exclusive series on the recommendations of the DTC Task Force. Part 1 on the key structural changes proposed by the committee can be found here, Part 2 on suggestions to address the decade-old Vodafone problem here, and Part 3 on plugging money laundering loopholes here.)
One area that has seen a lot of tinkering in the government’s annual budget exercise is the taxation of capital gains. The changes have been mainly to capital gains tax rates applicable to different classes of assets and the holding periods that determine whether the gains would be taxable as short term or long term. This year too there is some pre-budget clamour to do away with the recently introduced long term capital gains tax.
The Direct Tax Code Task Force, in its report, deliberated on the capital gains taxation framework in detail and has proposed a simplified regime. Taxsutra has spoken to those involved in the finalisation of the report and identified the key changes recommended.
But first it is necessary to acknowledge the complexity of the current capital gains tax framework to put the report’s recommendations into context.
For instance, the holding period and tax rate for LTCG vary based on multiple factors such as type of asset, whether the security is listed on the stock exchange, applicability of Securities Transaction Tax, residential status of the taxpayer, etc.
Consider the taxability of long term capital gains on sale of equity shares of a company.
For the capital gains to be considered long term the holding period for listed equity shares is 12 months but for unlisted shares it is 24 months.
If the sale or transfer of the listed equity shares is done on a stock exchange where STT is levied, the LTCG tax rate applicable is 10 percent. But gains of up to Rs 1 lakh are exempt.
For shares that were listed on the stock exchange after Jan. 31, 2018, the taxpayer can compute LTCG after considering indexation benefit up to financial year 2017-18. But indexation benefit is not available on shares that stood listed on the stock exchange on Jan. 31, 2018.
Further, for off-market transactions of listed equity shares where STT is not paid, tax payable on LTCG is lower of 20 percent of gains computed after considering indexation benefit or 10 percent of gains computed without considering indexation benefit. However, in the case of unlisted equity shares, the tax rate is 20 percent after considering indexation benefit.
There are special provisions applicable to non-residents Indians, foreign institutional investors, etc., which have an impact on capital gains taxation. In case of LTCG arising to a non-resident taxpayer on unlisted equity shares of a closely held company, applicable tax rate is 10 percent without considering indexation benefit.
The DTC task force report recommends categorisation of assets into 3 classes —
- financial assets like equity shares, units of equity oriented mutual funds, business trusts
- other financial assets
- non-financial assets
The recommendations as understood by Taxsutra are —
STT And Exemptions
Since those who argue against the levy of capital gains tax often cite the STT burden as grounds enough, the DTC report’s view on STT is important too. It recommends the continuation of STT which was brought into effect in 2004.
As for capital gains tax exemptions, the report recommends they should be kept at a bare minimum. Currently, the taxpayer can claim exemption from taxation of long term capital gains on certain assets by making investments in qualified assets such as residential property, bonds of National Highway Authority of India and Rural Electrical Corporation, subject to fulfillment of various conditions.