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.
