An era of exemption on LTCG comes to an end
ET CONTRIBUTORS|
Feb 08, 2018, 03.55 PM IST
By Hemal Mehta & Soniya Vyas
After much speculation over the last few days, long-term capital gains tax on sale of listed equity shares amongst other instruments is proposed to be introduced effective April 1, 2018. The rationale given for such introduction in the memorandum is that the existing tax regime is biased towards manufacturing, which has led to diversion of investments in financial assets. Introduction of capital gains tax would provide level playing field.
As per the proposal tabled by Finance Minister Arun Jaitley, it is sought to tax long-term capital gains arising on sale of listed equity shares, units of equity-oriented fund or units of business trust at a rate of 10 per cent (plus applicable surcharge and cess). Additionally, the said tax rate would apply-
a. To listed equity shares where acquisition and sale both have been subjected to Securities Transaction Tax (STT).
b. To units of equity-oriented funds and units of business trusts where the transfer of such asset was subjected to STT.
The central government may by notification specify the nature of acquisition to which the condition of levy of STT at the time of acquisition may not apply. A similar amendment was introduced in the Finance Act 2017, and specific carve-outs were provided separately therein with respect to certain acquisitions inter-alia, acquisitions made in compliance with the Foreign Direct Investment (FDI) guidelines, acquisitions which have been court / NCLT-approved, acquisition under ESOP scheme etc.
A clarification sooner would be appreciated especially by private equity industry where sizable listed shares are acquired off the market, or the company may have got its shares listed pursuant to an IPO. Lack of clarity may lead to ambiguity in the tax implications after the provisions would come into force. It could also result in applicability of higher tax rate of 20% (plus applicable surcharge and cess) on such long term capital gains.
Further, the cost of acquisition of the said assets as acquired prior to February 1, 2018, shall be higher of:
a. Actual cost of acquisition or
b. Lower of fair market value or full value received on the transfer of such asset.
It can be explained through an example how the cost would be computed for purposes of long term capital gains computation.
Say, equity shares were acquired on June 1, 2016 for Rs 100. As on January 31, 2018, the fair value is Rs 160. The shares would be sold on say June 1, 2018 for Rs 200. As per the proposal, cost would be Rs 160 and hence long-term capital gains would be Rs 40. If the same would be sold up to March 31, 2018, the capital gains exemption would continue and no tax would be payable at the time of sale of those shares.
This proposal is applicable to all category of investors including foreign portfolio investors (FPIs). It needs to be seen how lucrative would India be as a jurisdiction for foreign investors given that the benefit under tax treaties have been done away with and long term capital gains tax under domestic tax law too have been introduced.
Given that the amendment is proposed to be brought in force from April 1, 2018, it would not be surprising that the window of two months is taken advantage of by earning LTCG without payment of tax.
(Hemal Mehta is Partner, Deloitte India and Soniya Vyas is Senior Manager, Deloitte Haskins and Sells. Views are personal)
After much speculation over the last few days, long-term capital gains tax on sale of listed equity shares amongst other instruments is proposed to be introduced effective April 1, 2018. The rationale given for such introduction in the memorandum is that the existing tax regime is biased towards manufacturing, which has led to diversion of investments in financial assets. Introduction of capital gains tax would provide level playing field.
As per the proposal tabled by Finance Minister Arun Jaitley, it is sought to tax long-term capital gains arising on sale of listed equity shares, units of equity-oriented fund or units of business trust at a rate of 10 per cent (plus applicable surcharge and cess). Additionally, the said tax rate would apply-
a. To listed equity shares where acquisition and sale both have been subjected to Securities Transaction Tax (STT).
b. To units of equity-oriented funds and units of business trusts where the transfer of such asset was subjected to STT.
The central government may by notification specify the nature of acquisition to which the condition of levy of STT at the time of acquisition may not apply. A similar amendment was introduced in the Finance Act 2017, and specific carve-outs were provided separately therein with respect to certain acquisitions inter-alia, acquisitions made in compliance with the Foreign Direct Investment (FDI) guidelines, acquisitions which have been court / NCLT-approved, acquisition under ESOP scheme etc.
A clarification sooner would be appreciated especially by private equity industry where sizable listed shares are acquired off the market, or the company may have got its shares listed pursuant to an IPO. Lack of clarity may lead to ambiguity in the tax implications after the provisions would come into force. It could also result in applicability of higher tax rate of 20% (plus applicable surcharge and cess) on such long term capital gains.
Further, the cost of acquisition of the said assets as acquired prior to February 1, 2018, shall be higher of:
a. Actual cost of acquisition or
b. Lower of fair market value or full value received on the transfer of such asset.
It can be explained through an example how the cost would be computed for purposes of long term capital gains computation.
Say, equity shares were acquired on June 1, 2016 for Rs 100. As on January 31, 2018, the fair value is Rs 160. The shares would be sold on say June 1, 2018 for Rs 200. As per the proposal, cost would be Rs 160 and hence long-term capital gains would be Rs 40. If the same would be sold up to March 31, 2018, the capital gains exemption would continue and no tax would be payable at the time of sale of those shares.
This proposal is applicable to all category of investors including foreign portfolio investors (FPIs). It needs to be seen how lucrative would India be as a jurisdiction for foreign investors given that the benefit under tax treaties have been done away with and long term capital gains tax under domestic tax law too have been introduced.
Given that the amendment is proposed to be brought in force from April 1, 2018, it would not be surprising that the window of two months is taken advantage of by earning LTCG without payment of tax.
(Hemal Mehta is Partner, Deloitte India and Soniya Vyas is Senior Manager, Deloitte Haskins and Sells. Views are personal)
