The intricacies involved in the provisions related to capital gains in the Income-tax Act, 1961 (the Act) related rules and frequent amendments brought in the Act over the years has made the capital gains tax regime quite complex. This was also highlighted by the former revenue secretary, Mr. Tarun Bajaj, in a recent interview, wherein he had mentioned that the current capital gains tax regime is too complicated and there is a need to simplify the regime so that there is no arbitrage created between financial products on account of tax advantage. The financial products should sell based on its strength rather than on the tax arbitrage.
In simple words, capital gains or loss means the difference between the cost of acquisition and sale proceeds of the asset. However, when it comes to the taxability of such capital gains, there are several factors which a taxpayer needs to keep in mind. Some of these factors are:
- Assets classes – whether movable or immovable
- If it is a financial product – whether it is listed or unlisted, it is share or mutual funds or ULIP or bonds or debenture, equity or debt oriented investment, STT paid or not paid.
- Period of holding – various thresholds; 12 months, 24 months and 36 months to qualify an asset long term or short term asset.
- Applicability of deemed provisions – for determing the cost of acquisition, sales proceeds, etc. after considering the stamp valuation or Fair Market Value.
- Applicable tax rates and surcharge rates – ranges between 5% to 30% and 10% to 37% respectively .
- Grandfathering provisions – applicable for a specific type of long term capital gains .
- Residential status of the taxpayer – Resident or a Non-Resident, as different provisions are applicable if the taxpayer is a Non-Resident.
- Indexation of cost – base year for indexation, some of the financial products are not eligible for price indexation benefit, is it beneficial to take cost indexation, etc.
- Exemption of long term capital gains tax – Investment in prescribed assets with certain conditions and compliances
- In case of capital loss – set off and carry forward provisions depending upon whether it is long term or short-term capital loss.
- Pass through entity structure – Partnership Firms, Venture Capital Funds, Alternative Investment Fund.
- Foreign assets – taxation of capital gains on sale of assets held in foreign jurisdiction(s)
- Reporting of assets and income in India tax return
The details mentioned above just provide a glimpse into the complexity of the issue. The list can continue with some more factors as well as one drills down further into the capital gains tax regime. It seems a little too much for an investor to consider these variety of factors while assessing the tax liability on the sale of his/ her capital asset. Such complex web of factors may lead to a wrong assessment of capital gains tax liability either at the time of advance tax payment stage or at the time of filing the tax return.
Consequently, this may lead to financial implications for the taxpayer in form of interest and penalty. We need to understand that it becomes difficult for a layman or an investor with non-tax background to know this ever-evolving capital gains taxation provisions while entering and exiting from an investment. Hence, it is the need of the hour to bring reforms in capital gains regime to make it simpler for taxpayers and investors.
In the upcoming budget, it is expected from Government to reduce the list of factors which the investor needs to keep in mind in calculating capital gains. The Government may consider simplifying the assets classes by bringing a parity in equity and debt instruments in terms of determining an asset as a long term or short term capital asset, same tax treatment for listed/ unlisted securities and simplify indexation provisions. Further, instead of having various tax and surcharge rates, one or two tax rates for long term and/or short term gains can be considered and single surcharge rate can be fixed for tax on capital gains.
Furthermore, for the investments in foreign countries, the taxpayers often come across issues when the structure of overseas investments’ entities is bit different than the usual structures/ investment in India, like if the investments is in form of units in foreign Limited Liability Partnership, Limited Liability Corporation, pass through entities, difference in taxation rules between India and foreign country, etc., which are not explicitly dealt with under the India tax law. The government should consider providing clarity on the taxation for such investments as well to eliminate the uncertainty.
India is one of the key emerging market economies wanting to attract more and more foreign investments and major reforms in capital gains regime can definitely gain the confidence of more foreign investors. The government may consider taking cues from the tax regime in some developed countries having simpler capital tax gains. Now, that we are inching closer to the Budget announcement, one needs to see what reforms and changes the government will bring in. The simplification and rationalisation of capital gains structure is keenly watched and expected.
(Sundeep Agarwal is Partner, Vialto Partners India. With inputs from Ritika Arora, Director. Views expressed are personal)
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