'Govt may not raise time frame of long-term capital gains tax'

While echoing the sentiments, Dalal also adds he has not heard anything on reduction of dividend tax.Talking about the Dividend Distribution Tax (DDT), Dalal says it is very high and there has been some talk of DDT being replace by withholding tax. If that is indeed true, it may actually be good for some shareholders.Below is the verbatim transcript of Ketan Dalal and Dinesh Kanabar’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: What is your expectation as far as long-term capital gains tax is concerned? Do you think given the market situation and how vulnerable it is, the government will go ahead with it? Kanabar: I would make two comments. First of all, the government collection on account of securities transaction tax on an annual basis is anywhere between Rs 6,000-7,500 crore; that is a steady income which is coming and clearly if one had to re-impose capital gains tax, securities transaction tax would have to be given a go by. Assuming that we look at the number of Rs 7,500 crore and we take a rate of tax of say 10 percent, unless there is a Rs 75,000 crore of gain on which you recover the taxes, there is no question of capital gains tax; number one. Number two, we still have the issue of India-Mauritius tax treaty which continues to apply. One has to wait till April 1 2017 as to whether general anti avoidance rules (GAAR) provisions come into play, etc by which time the India-Mauritius treaty could be viewed very differently. So, given the situation where we are today and the very fact that people are not necessarily making very significant gains, I don’t think practically it makes sense. Also, if you consider one other issue that the government is looking in this particular Budget to simplify many of the provisions, the disinvestment plan has not fallen in place and that needs to be put in place. I don’t think this is a right point of time when the government will want to relook at capital gains tax. Latha: What is your sense, have your clients already started calling you and asking you about the possibility of the short-term capital gains tax getting extended to three years? Are they also worried about that exemption for long-term likely to go away? Is this a worry that is keeping your phones ringing? Dalal: People are worried about it but as Dinesh Kanabar mentioned, not too many people are making gains. I will just make two other points. If one year becomes three years, which as I said is unlikely, one of the things is, one is the gains between one to three years will be leviable to a 17 percent tax including surcharge because that is the rate on short-term. However, do remember that people have made a lot of losses. So, that is carry forward and as Dinesh mentioned, if you consider all of that then I am not sure that net of securities transaction tax, how much is the government revenue. The second point is that the one year to three year, would it only be on shares or would it be on equity oriented mutual funds as well? I think if you look at the overall picture, I really doubt whether at this point of time, given the overall environment, I very much doubt whether that one year to three year will really happen. Of course one has to wait till the 29th but I really doubt it. Sonia: The other thing I wanted to bring about is the dividend distribution tax (DDT). The market wants the dividend distribution tax to be abolished or perhaps even bring it down to about 5-7 percent. It may not cost much to the exchequer but it will be a massive attraction for equity investors. What is the sense that you are getting? Dalal: I have not really heard anything on the rate being reduced but what I have heard and that is just in passing and I really don’t know whether to call it a rumour or whatever, there is at least some thinking on the part of the government that should the dividend distribution tax be there or should we really go back to the regime of withholding tax because there are two things in this. One is, the DDT was introduced primarily because the government believed that collection is easier. It is better to collect from one corporate rather than to collect from say thousands of shareholders. Now, that the government’s information technology system and tracking mechanism is more robust, the thought process should be move back to it. The second reason is an economic reason why there is a thought process to that effect which is that DDT tends to be regressive. What happens is that everybody effectively is bearing 20 percent regardless of whether one’s income is Rs 2 lakh per year or whether one’s income is Rs 10 crore per year. When the company is bearing the DDT, economically the shareholders are bearing, whereas if you do it in a withholding tax sense, somebody who has a low income will actually benefit because he would then not be paying tax. Of course somebody who is having a very high income would then be taxable at 30 percent instead of 20 percent. So, it cuts both ways.However, overall the DDT is regressive in one manner because of the economic taxation. So, to answer your question, I have not heard anything of reduction on DDT but I have heard that the possibility is there. I don’t know whether in this Budget or next Budget but at least there is a thought process is at least what I have heard. One more point, if DDT is abolished and it becomes withholding tax, then from a cross border perspective there is a benefit to international investors because the DDT is not creditable in their home country but the withholding tax would be creditable. Latha: Would replacement of DDT by withholding tax be revenue neutral? Kanabar: Actually what I have heard and what I would not be surprised if it does happen is that apart from a dividend distribution tax being paid by the company, if the recipient of the dividend is having more than a particular quantum of dividend, say the dividend is more than Rs 1 crore, then on that dividend income, instead of the dividend income being exempt in the hands of the recipient, there could be an additional tax because presumably a person who is receiving a Rs 1 crore dividend also is liable to tax on a maximum marginal rate of 30 percent or whatever is the new rate which comes about. Therefore an incremental tax would be payable. I have heard this and I would not be surprised if this does come about because this is effectively taxing the superrich. (Copy edited by Devika Ghosh, interview transcribed by Priyanka Deshpande)