Mukesh Patel.in
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Now no Capital Gain without Tax Pain!

End Of Tax Honeymoon For Market Investors!

Understanding The New Capital Gains Regime

New Rules for Computation

  • Present distinction between long term and short term gains to be eliminated.
  • Current exemption for capital gains arising from transfer of personal effects and agricultural land beyond specified urban limits to continue.
  • Base date for computing cost of acquisition shifted from 1st April, 1981 to  1st April, 2000. 
  • Indexation benefits can be availed for all assets held for atleast one year.  

No More Tax Concessions

  •  Zero tax on STT paid long term capital market gains and 15% concessional rate for short term market gains to end on 31st March, 2011. 
  • No more concessional rates of 10%/20% for taxing specified long term gains. 
  • All capital gains to be taxed at the taxpayer’s applicable marginal rate. Securities Transaction Tax (STT) to be simultaneously eliminated.

 Exemptions Abolished & Redesigned

  • Present exemption u/s. 54EC via investment in specified bonds abolished. 
  • Current exemptions u/s. 54, 54B and 54F attempted to be redesigned under a new scheme of relief for roll over on the basis of a given formula. 

             The Direct Tax Code proposes to virtually end the tax honeymoon enjoyed by investors over the years. A host of tax concessions and exemptions in respect of capital gains as currently enjoyed under the present Income-tax Act have been proposed to be abolished or redesigned (refer text in the box annexed).

 Some Welcome Features

        The proposal to continue exemption for personal effects and agricultural land beyond specified urban limits is sensible. But, what is indeed a welcome feature is shifting the base date for computing the cost of acquisition (at the option of the taxpayer) from 1-4-1981 to 1-4-2000. It needs to be borne in mind that the last similar shift from 1974 to 1981 was done way back in 1993 and this change was overdue. Impliedly, this will exempt the notional gain of any capital asset held by a taxpayer during 1981 to 2000. Continuing the present scheme of indexation for purposes of computing the taxable capital gains is also a step in the right direction.

 Shoddy Drafting needs a Review

             While the present exemption u/s. 54EC via investment in specified bonds is proposed to be abolished, an attempt has been made to redesign the current exemptions u/s. 54B through investment in agricultural land and u/s. 54 and 54F where investment is made in a residential house. However, the drafting of the provisions in this regard, termed as ‘relief for rollover of an investment asset’ under the new Section 53 as proposed, is quite sloppy and needs a review. To illustrate, while, Section 53 stipulates that the amount deposited under the Capital Gains Savings Scheme (CGSS) should be withdrawn from the account for purchase or construction of the new asset within three years, quite strangely Section 56(2)(x) states that any withdrawal from CGSS ‘under any circumstances’ shall be taxed as ‘income from residuary sources.

Impact on the Capital Market

            The sizable flow of foreign funds (particularly through the Mauritius route) in the Indian capital market during the past few years can be largely attributed to the zero tax benefits enjoyed by them under the present regime. FIIs and even NRIs, having enjoyed the zero-tax pudding all along, may now not relish the taste of the flat 30% tax as proposed under the Code. It is pertinent to note that the Code has smartly attempted to override all treaty provisions at one go under the new Section 258.

             Capital market experts have expressed their concern over portfolio inflows and future market growth in view of the likelihood of foreign funds shifting to more tax-friendly emerging markets, if the tax proposals under the Code are given a final shape. While the Government may not want to sacrifice its tax revenue, it cannot also be oblivious of the growth concerns of the market.

Options for Consideration

            In 2004, when STT was introduced, the logic forwarded was that it was easier to collect STT than capital gains. Infact, in 2007-08, when the market was on the roll, the STT collection peaked at Rs.8,577 crores. Rather than lose STT altogether, the FM may wish to consider the option of continuing the same for all market operations, fine-tuning it to balance the scales of equity in the case of day traders. STT can suitably be packaged with a concessional tax on capital gains, say 10%.                 

Don’t Kill the Goose that lays the Golden Egg!

            The Government needs to realize that it cannot afford to kill the goose that lays the golden egg. Rather than inflicting a harsh 30% tax blow on the capital market gains, which can go to hurt the market sentiment and its volumes, thus affecting the resultant gains, it may be much wiser to consider the option of a 10% tax on capital gains coupled with fine-tuned STT.

             Having already proposed to do away with the distinction between long term and short term gains and also plug the loophole of the Mauritius route, the taxman can for sure reap much healthier revenues even under the above option.

            And the capital market investor who is now paying 15% tax on his short term gains alongwith STT and is under threat to pay upto 30% on both short term and long term gains (as proposed), should certainly have reason to smile if he is asked to pay, a flat 10% as capital gains with STT.   

             A win-win proposal for both the taxman & the taxpayer! Open for debate and considered deliberation!

 

            The Direct Tax Code proposes to virtually end the tax honeymoon enjoyed by investors over the years. A host of tax concessions and exemptions in respect of capital gains as currently enjoyed under the present Income-tax Act have been proposed to be abolished or redesigned (refer text in the box annexed).

 

Some Welcome Features

 

            The proposal to continue exemption for personal effects and agricultural land beyond specified urban limits is sensible. But, what is indeed a welcome feature is shifting the base date for computing the cost of acquisition (at the option of the taxpayer) from 1-4-1981 to 1-4-2000. It needs to be borne in mind that the last similar shift from 1974 to 1981 was done way back in 1993 and this change was overdue. Impliedly, this will exempt the notional gain of any capital asset held by a taxpayer during 1981 to 2000. Continuing the present scheme of indexation for purposes of computing the taxable capital gains is also a step in the right direction.

 

Shoddy Drafting needs a Review

 

            While the present exemption u/s. 54EC via investment in specified bonds is proposed to be abolished, an attempt has been made to redesign the current exemptions u/s. 54B through investment in agricultural land and u/s. 54 and 54F where investment is made in a residential house. However, the drafting of the provisions in this regard, termed as ‘relief for rollover of an investment asset’ under the new Section 53 as proposed, is quite sloppy and needs a review. To illustrate, while, Section 53 stipulates that the amount deposited under the Capital Gains Savings Scheme (CGSS) should be withdrawn from the account for purchase or construction of the new asset within three years, quite strangely Section 56(2)(x) states that any withdrawal from CGSS ‘under any circumstances’ shall be taxed as ‘income from residuary sources.

           

Impact on the Capital Market

 

            The sizable flow of foreign funds (particularly through the Mauritius route) in the Indian capital market during the past few years can be largely attributed to the zero tax benefits enjoyed by them under the present regime. FIIs and even NRIs, having enjoyed the zero-tax pudding all along, may now not relish the taste of the flat 30% tax as proposed under the Code. It is pertinent to note that the Code has smartly attempted to override all treaty provisions at one go under the new Section 258.

 

            Capital market experts have expressed their concern over portfolio inflows and future market growth in view of the likelihood of foreign funds shifting to more tax-friendly emerging markets, if the tax proposals under the Code are given a final shape. While the Government may not want to sacrifice its tax revenue, it cannot also be oblivious of the growth concerns of the market.

Options for Consideration

 

            In 2004, when STT was introduced, the logic forwarded was that it was easier to collect STT than capital gains. Infact, in 2007-08, when the market was on the roll, the STT collection peaked at Rs.8,577 crores. Rather than lose STT altogether, the FM may wish to consider the option of continuing the same for all market operations, fine-tuning it to balance the scales of equity in the case of day traders. STT can suitably be packaged with a concessional tax on capital gains, say 10%.

                      

Don’t Kill the Goose that lays the Golden Egg!

 

            The Government needs to realize that it cannot afford to kill the goose that lays the golden egg. Rather than inflicting a harsh 30% tax blow on the capital market gains, which can go to hurt the market sentiment and its volumes, thus affecting the resultant gains, it may be much wiser to consider the option of a 10% tax on capital gains coupled with fine-tuned STT.

 

            Having already proposed to do away with the distinction between long term and short term gains and also plug the loophole of the Mauritius route, the taxman can for sure reap much healthier revenues even under the above option.

 

            And the capital market investor who is now paying 15% tax on his short term gains alongwith STT and is under threat to pay upto 30% on both short term and long term gains (as proposed), should certainly have reason to smile if he is asked to pay, a flat 10% as capital gains with STT.   

 

            A win-win proposal for both the taxman & the taxpayer! Open for debate and considered deliberation!

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