Capital Gains Tax on equity instruments is back!
Published: Feb 21, 2018
By Ashesh R Safi, Jigar Shah & Suraj Nair
CURRENTLY, long-term capital gains arising on transfer of equity shares or units of equity-oriented mutual fund or units of business trust (herein after referred as equity instruments) is exempt from tax provided such transaction is subject to Securities Transaction Tax (STT).
The said exemption was introduced by the Finance Act, 2004 to simplify the taxation on capital market transactions. The simplification of taxation was to be achieved by exempting long-term capital gains from tax and introducing STT to be levied on the transaction value. The rate of STT was enhanced subsequently at various intervals.
The Finance Act, 2017 had restricted such exemption to only those equity shares where the purchase and sale of shares was on a recognized stock exchange and subjected to STT. However, certain exceptions to the said rule were notified.
As the equity investment market has become buoyant, there was wide spread speculation that the central government would propose certain alterations to tax long-term capital gains arising on transfer of equity instruments.
As expected, the Finance Minister has announced a new model for taxation on long-term capital gains on equity instruments which are subject to STT. The significant features of the new tax model is as under:
I. Taxability of capital gains
• It is proposed that any long-term capital gain arising on sale of equity instruments on or after 1 April 2018, exceeding Rs.1 lakh, shall be taxable at a concessional rate of 10%. Such rate shall need to be appropriately increased by applicable surcharge and cess. Accordingly, long-term capital gain up to Rs.1 lakh shall continue to be not subject to tax.
• The benefit of indexation shall not be available while computing the capital gain.
• There is no change in restriction of holding period i.e. the equity instruments shall be considered as long-term capital asset if held for more than 12 months.
II. Computation of capital gains
• The Finance Minister while proposing the tax on long-term capital gains has provided grand fathering for instruments held as at 31 January 2018. It is proposed that the cost of acquisition for computing capital gains of such instrument shall be higher of (i) the actual cost of acquisition of such instruments or (ii) lower of Market Value of shares /NAV of units or actual consideration received.
• The benefit of basic exemption limit shall continue to be available for such long-term capital gains.
• The deduction of chapter VI-A shall not be available to beset-off against long-term capital gains.
The amendments are to take effect from 1 April 2018, and apply to the assessment year 2019-2020 onwards. Thus, any capital gains arising on sale of equity instruments on or before 31March 2018, shall not be liable to tax under the new provision.
It is important to note a dichotomy between capital gains tax on listed and unlisted equity instruments / off market deals. While the tax payer has an option to pay tax on unlisted equity instruments / off market deals at 20% with indexation benefit and 10% without indexation benefit, no such option is available in case of listed equity instruments subject to STT. The proposals in the Finance Bill, 2018 leads to a situation wherein there are different tax rates for various categories of capital gains.
The impact of introduction of Long-term Capital Gains shall also be felt on certain exemption provisions of the Act. As per existing provisions of the Act exemption from long-term capital gains tax was provided on transfer of any long-term capital asset provided such gain is invested in specified bonds, subject to certain limitation and conditions.
The Finance Bill 2018 proposes to amend the law to restrict the benefit of this exemption. The said exemption will now only be available on gains arising from transfer of long-term capital asset being land or building or both. Further, holding period for such bonds has been extended from 3 years to 5 years.
Such exemption now cannot be claimed in respect of gain arising from transfer of equity instruments on or after 1 April 2018.
The aforesaid tax regime of 10% has also been provided for Foreign Portfolio Investors. However, it appears that such investors may not be able to take benefit of the grand fathering provision discussed above.
(Ashesh R. Safiis Partner,Jigar Shah is a Senior Manager & Suraj Nair is a Deputy Manager with Deloitte Haskins and Sells LLP. The views expressed are strictly personal.)
