Taxation

This is the second article in the series of discussion related to Direct Tax Code. The first article was -

Brief On Revised Discussion Paper For Direct Tax Code (DTC) For Minimum Alternate Tax (MAT)

Capital Gain Tax

Brief On Revised Discussion Paper For Direct Tax Code (DTC) For Capital Gains

Current Situation:

Short-term capital gains (STCG) arising on transfer of listed equity shares or units of equity oriented funds are being taxed at 15% and Long term capital gain (LTCG) arising on transfer of listed equity shares or units of equity oriented funds are exempt from tax.

Proposed in DTC:

• Under DTC distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of the asset have been eliminated.

• Income under the head Capital Gains will be considered as income from ordinary sources in case of all taxpayers. It will be taxed at the rate applicable to respective taxpayer.

• Currently for Non resident Income under the head Capital Gains is taxed at nil rates if held for more than 1 year.

• Under DTC in case of non resident Income under the head Capital Gains will be considered as income from ordinary sources and will be taxed at the rate of 30%

Limitation of Capital Gain Tax as proposed in DTC

• The withdrawal of the current scenario of charging 15 % for STCG and LTCG exempt regime will raise the tax liability and may cause fluctuations in the capital market.

• Also charging at the rate of 30 percent is very high as compared to nil rate. Foreign Institutional Investors play a significant role in the Indian capital market. Various countries, including emerging markets, offer non-residents a special tax regime to attract investments and promote depth of capital markets.

Proposed in Discussion Paper for DTC:

• Income under the head Capital Gains will be considered as income from ordinary sources in case of all taxpayers including non-residents. It will be taxed at the rate applicable to that taxpayer.

• In case of listed equity shares or units of an equity oriented fund held for period of more then 1 year Capital Gain will be computed after allowing a deduction at a specified percentage of capital gains without any indexation. This adjusted capital gain will be included in the total income of the taxpayer and will be taxed at the applicable rate. The loss arising on transfer of such asset held for more than one year will also be treated in similar fashion.

• For instance: If the capital gain before deduction at the specified rate comes to Rs.100, it would stand reduced to Rs.50 (if the specified deduction rate is 50 percent). The capital gain of Rs.50 would then be included in the taxpayer’s total income and taxed at the applicable rate. In this example, for a taxpayer in the tax bracket of 10%, such gain will bear an effective tax at the rate of 5% and for taxpayers in tax bracket of 20% or 30%, the effective tax rate would be 10% or 15% respectively.

• In case of Capital gains on other asset held for more than one year the base date for determining the cost of acquisition will now be shifted from 1.4.1981 to 1.4.2000. As a result, all unrealized capital gains on such assets between 1.4.1981 and 31.3.2000 will not be liable to tax. The capital gains will be computed after allowing indexation on this raised base. The capital gains on such assets will be included in the total income of the taxpayer and will be taxed at the applicable rate.

• The Capital gain arising from transfer of any investment asset held for less than one year from the end of the financial year in which it is acquired will be computed without any specified deduction or indexation. It will be included in the total income and will be charged to tax at the rate applicable to taxpayer.