The Direct Tax Code draft proposed by a government panel earlier this month may have sought to substantially lessen the tax burden on individuals and corporates, but it won’t alter the current tax regime for participation in and gains from the stock markets. According to official sources, extant taxes on the short-term and long-term capital gains from sale of assorted assets, including the contentious LTCG tax introduced for listed equities in the Finance Act 2018, will not only remain but will be levied at the same rates as now, post-adoption of DTC. So will be the case of securities transaction tax (STT).
Currently, LTCG tax on equities and equity-oriented mutual fund is levied at 10% on the proceeds in excess of Rs 1 lakh, if the sale is executed with 12 months of purchase.
If sold before a year of purchase, a 15% tax on gains is levied as short-term capital gains tax. “Ideally, India should remove LTCG tax for a few years to make out a tax regime competitive vis-a-vis other countries. Several countries don’t levy capital gains on sale of listed shares, which makes India less attractive to capital,” Amit Maheshwari, partner, Ashok Maheshwary & Associates said.
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For assets other than listed equities, LTCG tax kicks in after a holding period of three years except for immovable property like land and house property, where the threshold is two years. The tax rate for LTCG on these assets is 20% while STCG is added to the income and taxed at the relevant slab rate. Also, the securities transaction tax (STT) is now levied at 0.1% of turnover for delivery-based equity transactions; as for intra-day transactions, there is no tax on purchase but sales are taxed at 0.025%.
The DTC panel seems to have struck a balancing act by proposing removal of Dividend Distribution Tax (DDT). This is expected to correct the anomaly of ‘triple taxation’ on distribution of profits to shareholders as dividends.
Currently, DDT is charged at an effective rate 20.6% (including surcharge and cess) in the hands of the domestic company, and it is further taxed at 10% on proceeds of over Rs 10 lakh at the shareholders’ end. Dividend received from a foreign company is taxed in India as well as in the country to which the company belongs. Of course, the taxpayer in such cases are entitled to claim double taxation relief under the relevant bilateral tax treaty or under Section 91 of the Income Tax Act.
The DDT concerning domestic firms are levied after a firm has already paid corporate tax, which effectively leads to ‘triple taxation’ on income from the same source. The government collected over Rs 41,000 crore from DDT in FY18.
“If the DDT (in the hands of the firms) is abolished, the overall incidence of tax by way of withholding tax on dividend would be much less on the shareholders. This should incentivise the investors to make equity investments, especially the foreign investors. Their expected internal rate of return from Indian investments would increase due to reduced tax incidence on return from equity. All of this should have positive impact on the investment climate,” Daksha Baxi, head of international taxation at Cyril Amarchand Mangaldas said.
Besides, the DTC panel has also submitted a draft bill which is nearly half the size of the current Income Tax Act, 1961, which is expected to remove ambiguities, sources said. The panel was tasked with bringing the new direct tax code in consonance with economic need of the country, and will replace the 58-year old existing Income Tax Act, 1961. Its original terms of reference included drafting the code in view of direct tax systems across various countries, international best practices and economic needs of the country.
The report and the draft law will also have suggestion on areas of faceless assessment, litigation management, process simplification and sharing of information among GST, Customs, CBDT and Financial Intelligence Unit, among others.