Explain what a Capital gains tax is. Also discuss whether the government’s move to bring back LTCG taxes to equity shares and equity-oriented mutual funds a step in right direction?
Refer – Business Line
Enrich the answer from other sources, if the question demands.
IAS Parliament 7 years
KEY POINTS
Capital gains tax
· 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.
Short term capital gain
· 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).
Long term capital gain
· 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.
Issue
· LTCG tax on stocks was scrapped in 2004-05. Now, GoI re-introduced LTCG tax on equity shares and equity-oriented mutual funds.
· Under this, investors have to pay 10% LTCG tax on gains exceeding Rs. one lakh on the sale of shares or equity mutual funds held for more than one year.
· If the gains exceeded Rs. one lakh in a year, then 10% LTCG tax had to be paid without the benefit of indexation (adjusting the profit against inflation to compute the real taxable gains).
Advantages of this move
· It reduces the disparity that currently exists in the tax treatment of equity and other investment classes such as debt.
· This move will have a positive effect on investor behaviour.
· The preferential treatment meted out to equity, had resulted in a skew in the investing pattern, with more money flowing into the stock market, exposing investors to higher risk.
· Also, it was hurting manufacturing companies that raise capital through debt and other instruments, by depressing the demand for these instruments.
· The Centre was also losing revenue through this leeway. So, it would now increase Government’s revenue.
· By taxing gains above Rs. 1 lakh, this move ensured that small investors do not come under the ambit of this tax.
Way Ahead
· The GoI should also consider allowing indexation of cost of shares and equity-oriented mutual funds for calculating long-term gains, in line with other assets.
· Else long-term investors in equity and equity mutual funds will be disincentivised from holding on for the long term.
