Simpler structure: Capital gains taxes may be up for review

Current regime is ‘complicated’, says revenue secy, hinting at changes.

LTCG review
Currently, the holding period for long-term capital gains tax is more than 12 months for listed shares/debt securities.

The government is open to simplifying the capital gains tax regime at the next available opportunity, a senior official said on Wednesday, prompting analysts to expect a lowering of the tax incidence on gains arising out of sale of unlisted equity shares, units of real estate investment trusts and perhaps even debt funds. It is not immediately clear whether these changes will be introduced in Finance Bill 2022, which is now under the consideration of Parliament or in the next year’s Budget.

Currently, the long-term capital gains tax (LTCG) is more benign on listed shares, while other types of assets, including real estate, attract the tax at higher rates, besides the taxpayers having to hold these for longer periods to escape the higher short-term taxes.

“We need to have a re-look at the capital gains structure in terms of the rates and the holding periods. We would be open to (modifying) the structure as we get an opportunity,” Union revenue secretary Tarun Bajaj said at a post-budget event organised by CII. He admitted that the current structure is “too complicated.”

The last time the government tinkered with the capital gains tax regime was in the Budget for FY19, when it reintroduced LTCG on listed shares.

A surge in capital market transactions and the market boom may allow the government to fetch tax revenue of between Rs 60,000 and 80,000 crore from all types of capital gains in the current financial year, Bajaj said. This could be many multiples of the collections in FY21.

The official added that the issue of capital gains tax creates a lot of friction when discussed in any forum due to the varied rates and the holding periods. “I think it is too complicated (a structure) that we have created… the problem is when we do something, some people will be losers as compared to (being under) the current provisions and some would be gainers,” he said.

Currently, the holding period for long-term capital gains tax is more than 12 months for listed shares/debt securities, while it is more than 24 months for unlisted shares and real estate, and 36 months for debt mutual funds and securities.

Long-term capital gains tax on listed shares is 10% on the gains exceeding Rs 1 lakh without indexation benefit while short-term gains are taxed at 15% (STCG), for both domestic and foreign investors. The LTCG is 20% on unlisted shares for domestic investors and 10% for non-residents while the STCG is payable at the applicable slab rate of the individual concerned. Similarly, STCG on debt funds is as per tax slab rates of the individual while LTCG is 20% with indexation benefit.

“There has to be parity between listed and unlisted stocks when it comes to the periods of holding. There is also (the issue of) higher tax rates for the short-/long-term capital gains concerning unlisted shares vis-a-vis listed shares,” said Gaurav Karnik, tax partner at EY India. It is unfair that an investor has to hold listed units of real estate investments trusts for 36 months to avail the (low) LTCG rate of 10%, while she has to hold listed shares for only 12 months (for the low rate).

While the tax department has already studied the capital gains tax rates in the peer nations and the developed world. Bajaj asked CII to conduct a study on the prevailing rates of capital gains tax across the world and prepare a report.

While the capital gains tax collections have been robust this year, the government is keeping its fingers crossed on the revenues from these taxes in FY23. “With tapering (tightening of rates by central banks and liquidity withdrawals) happening and interest rates going up in the US, one doesn’t know how the market is going to play up (in FY23),” Bajaj said.

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