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Long-term capital gains - Budget 2018-19

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Long-term capital gains - Budget 2018-19
By: CA DEV KUMAR KOTHARI
February 2, 2018
  • Contents

Budget 2018 proposals:

Long-term capital gains on shares and Equity oriented funds-proposed provisions are full of complexities -difficult to ensure compliance by  taxpayers

Simplification is far distant dream:

Simplification of tax provisions is very much required to ensure correct and full compliance. Many times taxpayers delay filing of return due to complexity of law and wait for authentic clarifications. Even after clarifications , it is experienced that many time each clarification create more confusions and causes more litigation. Provisions relating to exemptions of LTCG and related issues have also seen lot of litigation going on , even after judgment of the Supreme Court we find more reasons of litigation because the judgments are based on particular facts in given case and a change in fact can cause different opinion.   

Simplification of tax provision (STT) is a far distant dream. Provisions of Security Transaction tax and revised tax scheme of taxing capital gains were introduced for simplifications. These included for example,   provisions of STT, exemptions and concessions  in section 10 and  111A, 112 respectively  and some other provisions  of the  Income-tax Act, 1961 like Section 14A.

The readers are well aware of complexities created by these provisions this is because, tax authorities are in habit of not considering objective and purposes of such simplifications. Some provisions may benefit to taxpayers because they are designed to allow benefit to taxpayers, but tax authorities are in habit of doubting genuineness of benefits allowable.

Now taxing Long-term capital gains even when STT is imposed is not at all justified.

This is the reason that there are high pitched assessments, large number of appeals causing harassment of common tax payers and un-necessary litigation.

Complexities:

From the provisions analysed below we find that complexities are involved in most of steps required for computation of capital gains and also about applicability of the provision.

 How taxpayers can understand and comply such complex provisions. Particularly small tax payers who may have slightly higher than Rs. one lakh of long term capital gains on transfer of shares can be expected to understand such complex provisions?

When government intend to ensure compliance by taxpayers and to accept most of Return of Income filed, it is very much essential that the provisions should be clear, simple and without ambiguity. This is also necessary to have our human resources and youth to be more productivity. Unless simplicity is enforced in all laws, unfortunately our country will continue to have lesser importance to Doctors, Engineers, Scientists and people engaged in productive work and brain drain will continue in unproductive but more remunerative occupation of managing litigation.

Tax on LTCG seems neutral in case of companies subject to MAT

LTCG tax on companies who are liable to pay MAT u.s. 115JB can be tax neutral because rate of tax on book profit (which may includes LTCG) is higher than 10%.

New proposed S.112A is very complex. The proposed section is reproduced below with highlights added by author to indicate important and complex:

From THE FINANCE BILL, 2018

31. Insertion of new section 112A.

After section 112 of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2019, namely:-

Tax on long term capital gains in certain cases.

 ‘112A. (1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if-

(i) the total income includes any income chargeable under the head “Capital gains”;

(ii) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust;

(iii) securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004 (23 of 2004) has,-

(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.

(2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of-

(i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent.; and

(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee:

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.

(3) The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.

(4) The Central Government may, by notification in the Official Gazette, specify the nature of acquisition in respect of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall not apply.

(5) The capital gains under sub-section (1) shall be computed without giving effect to the provisions of the first and second provisos to section 48.

(6) The cost of acquisition for the purposes of computing capital gains referred to in sub-section (1) in respect of the long-term capital asset acquired by the assessee before the 1st day of February, 2018, shall be deemed to be the higher of-

(i) the actual cost of acquisition of such asset; and

(ii) the lower of-

(a) the fair market value of such asset; and

(b) the full value of consideration received or accruing as a result of the transfer of the capital asset.

(7) Where the gross total income of an assessee includes any long-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.

(8) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

Explanation.-For the purposes of this section,-

(a) “equity oriented fund” means a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10 and,-

(i) in a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,-

(A) a minimum of ninety per cent. of the total proceeds of such fund is invested in the units of such other fund; and

(B) such other fund also invests a minimum of ninety per cent. of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and

(ii) in any other case, a minimum of sixty-five per cent. of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange:

Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;

(b) “fair market value” means,-

(i) in a case where the capital asset is listed on any recognised stock exchange, the highest price of the capital asset quoted on such exchange on the 31st day of January, 2018: Provided that where there is no trading in such asset on such exchange on 31st day of January, 2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value;

(ii) in a case where the capital asset is a unit and is not listed on a recognised stock exchange, the net asset value of such asset as on the 31st day of January, 2018;

(c) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005(28 of 2005);

(d) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43.’.

Memorandum explaining proposal:

Clause 31 of the Bill seeks to insert a new section 112A of the Income-tax Act relating to tax on long-term capital gains in certain cases. The proposed new section 112A provides that where the total income of an assessee, includes any income chargeable under the head "Capital gains", arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, subject to the conditions specified under the section, the tax payable by the assessee on the capital gains exceeding one lakh rupees shall be calculated at the rate of ten per cent.

It is further proposed to provide that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.

It is also proposed to provide that capital gains arising from a transaction undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is received or receivable in foreign currency, shall be eligible under this section without payment of securities transaction tax.

It is also proposed to provide that the provisions of this section shall not apply to any income arising from the transfer of a longterm capital asset, being an equity share in a company, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004.

It is also proposed to provide that capital gains under the said section shall be computed without giving effect to the first and second proviso to section 48.

It is also proposed to provide that the cost of acquisition for the purposes of computing capital gains under the section in respect of capital asset acquired by the assessee before the 1st day of February, 2018, shall be as provided in the said section.

It is also proposed to provide that where the gross total income of an assessee includes any long-term capital gains, deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.

It is also proposed to provide that where the total income of an assessee includes any long-term capital gains referred to in the said section, the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

It is also proposed to define the expressions "equity oriented fund", "fair market value", "International Financial Services Centre"and"recognised stock exchange".

This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent years.

 

By: CA DEV KUMAR KOTHARI - February 2, 2018

 

 

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