By SR Patnaik, and Reema Arya
The Budget 2024 is less than a week away and the taxpayers are eagerly waiting for the revisions and amendments to be introduced by the Finance Minister Nirmala Sitharaman. Considering this is the first budget after the general election, it undoubtedly carries the weight of numerous, and at times, unreal expectations.
Among the myriad of reforms awaited, a comprehensive overhaul of the capital gains tax regime stands out as a top priority for corporations, individuals, and other stakeholders. This is because while the capital gains taxation regime has evolved over the years and the same has led to creation of a large number of sub-categories for taxation of every type of capital asset based on the time-period for which it was held, how it was acquired and being sold, the currency used to acquire, if the asset was acquired as a part of earlier reorganisation, etc.
With increasing internationalisation of Indian businesses and economy, increasing collaboration between Indian and global businesses and global expansion of Indian businesses have collectively added to the complexities of computing capital gains. These aspects have led to disparity on account of rate of tax, benefits of indexation or foreign currency fluctuation, benefits available for taxpayers and incentives offered, etc. and creates scope of confusion amongst the various categories of taxpayers.
On account of the above factors, it is expected that the Finance Minister will pay heed to the increasing demand for rationalisation and simplification of the capital gains taxation regime in India.
Standardisation in the period of holding
Capital gains are categorized into long-term capital gains or short-term capital gains based on the holding period of the underlying asset. For instance, listed equity shares and equity-oriented funds held for more than 12 months are classified as long term.
In the case of unlisted equity shares and real estate, the holding period is 24 months. For other capital assets like debt funds, InvIT and REIT, the threshold period is 36 months to qualify as long term. Instead of such multiple categories, the budget may simplify and make it only two categories (i.e. short-term of 24 months or less and long-term for assets held for more than 24 months).
Rate of tax should be lowered
Short-term capital gains tax is levied at the applicable tax rates, which may go up to 40 percent for foreign companies or 30 percent for individuals, on which surcharge and education cess are also payable, which leads to the chargeable rate going all the way up to 44 percent and 39 percent respectively. This could be regarded as too high by global standards. Hence, it is expected that the budget may bring down the effective rate to around ~30 percent.
Raise exemption limits for stock market transactions
Since the reintroduction of LTCG on listed equity instruments in the year 2018, the exemption threshold for equity shares has remained steady at Rs 1 lakh. Increasing this limit is expected to further encourage investments and give a push to the economic activity, as more and more individuals would be interested to engage and book gains from the stock market.
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Simply benefits of forex flutuations
The benefit of foreign currency fluctuation to foreign investors is not available in certain cases which makes it extremely unattractive for such non-resident investors. Moreover, there are certain other instances wherein either the purchase or the sale is done in another currency and the investors are not permitted to claim deduction for such fluctuation. It would be help if the budget addresses these concerns and simplifies the system of claiming such fluctuations.
Change in the manner of levy of buyback tax
Buyback tax is levied at the flat tax rate of 20 percent which goes up to 23.296 percent to be deposited by the company undertaking buyback. The base on which such tax is calculated also provides for rate at which shares were originally issued, irrespective of multiple times at which it was already sold in the interim, leading to unavoidable double taxation. With the advent of technology, it is possible to abolish the buyback tax and make it taxable in the hands of the shareholders – similar to how dividend is taxed. This shall play a significant role in appropriate distribution of profits to the shareholders.
Conclusion
The Government has been continuously aiming towards devising methods to simplify the tax system, improving the ease of doing business and creating an investor-friendly environment for investors. One of the primary methods to achieve this aim is through standardising and rationalising the convoluted tax structure, thereby reducing the unnecessary litigation and the wastage of infrastructure in fighting the same. If the proposed changes are implemented, it could lead to a more efficient tax regime that would comprehensively benefit the investors, the government and eventually the broader economy.
SR Patnaik is Partner & Head-Taxation at Cyril Amarchand Mangaldas and Reema Arya is a consultant.
Views are personal and do not represent the stand of this publication.
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