1. Capital concerns

Capital concerns

If the minimum holding period for capital gains tax waiver is increased to 36 months from 12 months now — as is rumoured it will — it could hurt investor sentiments for no meaningful revenue gain...

By: | New Delhi | Updated: February 24, 2016 1:14 AM

If the minimum holding period for capital gains tax waiver is increased to 36 months from 12 months now — as is rumoured it will — it could hurt investor sentiments for no meaningful revenue gain, analysts said, reports Siddhartha P Saikia in New Delhi. Also, since the securities transaction tax (STT) ensures that market transactions are reasonably taxed, the proposed move would be superfluous, they said. Also, though the PM has said dividends are totally exempt from income tax, this is incorrect as, in FY14, over Rs 25,000 crore was collected by way of dividend distribution tax.

When STT was introduced in 2004, the rationale cited was that it could replace the long-term capital gains tax and create a level playing field for all participants in the stock market. It was also seen as a way to mobilise additional revenue.

STT rates saw a jump in FY10 and FY11 but have since come down. The rates currently vary between 0.01% and 0.125% depending on the instrument (STT is levied on transaction of equities as well as their derivatives). The government’s STT collections have been robust, with revenue this year projected to be over Rs 6,500 crore.

At present, listed shares enjoy concessional tax treatment both in terms of holding period and the tax rate, while they, unlike other asset classes, are subjected to the STT.

The tax on capital gains on equity shares held in a company listed on a recognised stock exchange and equity-oriented mutual funds is zero if the stock is held for more than 12 months, while gains made in a shorter period would attract 15% tax.

However, in the case of unlisted shares, the tax rate is 20% (with indexation) if held for more than 36 months (considered as long-term) and 30% for domestic companies and 40% for foreign companies for holdings less than three years.

“The need of the hour is encourage investments into companies (whether listed or unlisted) to meet the capital needs of the aspirational programmes of the government. A contrarian approach would be to bring in parity between listed and unlisted companies and reduce the (long-term period) for unlisted companies from 36 to 12 months, at par with the term for listed securities,” said Girish Vanvari, partner and head of tax, KPMG in India.

The rationale for the move to narrow the tax waiver window for listed securities is that capital gains tax is levied for all other types of assets held for comparable periods. Currently, the period of holding for all asset classes (except listed securities) is three years to qualify as a long-term capital asset. Thus, if shares are held in an unlisted company, or a residential house or a commercial office space, if the asset is held for more than three years, then the seller is entitled to treat such asset as a long-term capital asset. Accordingly, the tax is charged at a lower rate.

In the case of listed shares, however, an exception has been carved out with a lower holding period for the waiver.
Despite the reduction in STT over the years, it constitutes a large percentage (next only to brokerage fee) of the total cost of trading.

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