The government has stood by its earlier plan to do away with the distinction between short term and long term capital gains for investment in all asset classes in the revised discussion paper on the Direct Taxes Code.

Despite of pleas from some industry associations that the proposed move will hinder the long-term savings and adversely affect the risk capital mobilisation CBDT?the apex body on direct taxes?has maintained that removal of the distinction will bring in further certainty and simplicity in taxation of capital gains.

The only sweetner offered by the CBDT?s is its decision to give an adhoc exemption or specified percentage deduction for computing adjusted capital gains in equity oriented funds . Dinesh Kanabar, deputy CEO and chairman of tax at KPMG pointed out that,? the step by the government is in the right direction as it will bring down the net effective taxes.?

?Going by the 50% to 70% bracket for ad hoc exemption shown in the revised DTC it is clear that there is some sort of consensus in providing more than 50% exemption,? NC Hegde partner at consultancy firm Deloite pointed out.

Under the proposed regime entire capital gains of the assessee will be added to income and will be taxed inline with their income slab. In case of gains made after one year in investment class other than stock market related asset classes, the proposed code allows indexation benefit ? adjusting the cost price of the asset for inflation over the years ? before adding the gains to total income.

Under the current tax regime any stock market asset ? listed equity shares or units of an equity fund –held for more than 12 months is considered as a long-term capital assets but all other investment assets have to be held for more than 36 months to be considered a long-term asset. Moreover, stock market related asset classes held for the long-term attract only the securities transactions tax while the other assets are levied a long term capital gains tax of 10%.

Foreign institutional investors were hit by the revised DTC. They will now have to pay tax on long- term capital gains at rates as high as 30% instead of nil at present .They will also have to shell out higher taxes on short term capital gains.

In an attempt to simplify the system of taxation, to bring in certainty and to eliminate unnecessary litigation the the income arising on purchasing and sale of securities by an FII shall be deemed to be income chargeable under the head capital gains. Under the existent regime some FIIs were characterising such income as ?business income? and were consequently claiming total exemption from taxation in the absence of a permanent establishment in India.