The author has stated “that the LTCG formulation is not only flawed in design, but also likely to yield very little tax revenue. At the same time, it manifestly increases the discretionary powers of the taxman and this has its own set of governance problems.” It is stated, that, the design of the LTCG has been a part of the Income-tax Act, 1961 since the early 1990s. With the introduction of STT in 2004, LTCG on listed equity shares was exempted. However, LTCG on unlisted equity shares continued to be taxed after providing for indexation. Accordingly, taxpayers are generally familiar with the LTCG regime including the mechanism for indexing the cost of acquisition w.r.t inflation. The new regime for LTCG proposed in the Finance Bill, 2018 has been designed in a similar manner. In fact, the computation of LTCG is now simpler since the cost of acquisition is not required to be indexed. This computation process does not involve any discretion on the part of the taxman. Moreover, all doubts have already been clarified by way of FAQs released by the CBDT as early as on February 4, 2018. More such FAQs can be released in due course, if the need arises. Thus, there is no reason to believe that the proposal will give rise to any kind of governance issues.
The author has sought to estimate the revenue gained from the proposal to levy LTCG by making several assumptions. The first estimate is based on the assumption that “the stock market gained an average amount of only 3.9% in financial year 2016-17.” As per publicly available data on the website of BSE, the BSE Sensex opened at 25,301 on April 1, 2016, and ended at 29,620 on March 31, 2017. Therefore, the increase in the Sensex in FY 2016-17 (Assessment Year 2017-18) was 17.07% and not as low as 3.9% as claimed by the author. Further, the market capitalisation (which forms a better basis for computation of capital gains) increased from Rs 94.75 lakh crore in 2015-16 to Rs 121.55 lakh crore in 2016-17, thereby registering a robust growth of 28.28%. On either count, the author seems to have under-estimated the growth in the stock market. It is, therefore, not surprising that his estimates are quite inaccurate.
The Finance Minister, while presenting the Union Budget 2018-19, stated that “the total amount of capital gains from listed shares and units is around Rs 3,67,000 crore as per returns filed for AY 17-18.” He was clearly referring to the amount of LTCG on listed security claimed as exempt. This information has been gathered from the returns filed by the taxpayers. However, while making the second estimate, the author has relied on the reported figures relating to the taxable amount of LTCG which has again, resulted in a fallacious estimate. It is unfortunate that the author has relied upon patently erroneous estimates to call into question the correctness of the figure stated by the finance minister on the floor of the House.
The third estimate by the author is based on the Kelkar Direct Taxes Task Force of 2002, which estimated that the tax revenue from LTCG in FY 2002-03 was Rs 1,000 crore. According to the author, applying a 20% tax rate on LTCG, the estimated income from LTCG works out to Rs 5,000 crore. This estimate reveals a patent anomaly as it has not been specified whether the tax rate on LTCG was 10% without indexation or 20% with indexation, at the option of the taxpayer. Going by the general trend, the taxpayer tends to exercise the option of 10% without indexation. Therefore, if a tax rate of 10% is applied on LTCG, the income from LTCG is estimated at Rs 10,000 crore. The market capitalisation in the year 2002-03 is reported to be Rs 5,72,197 crore. The income from LTCG represents 0.0175% of market capitalisation. Applying this to the market capitalisation of `145,68,791 crore in the year 2017-18, the income from LTCG is estimated at Rs 2,54,954 crore, and the potential tax revenue accruing from LTCG is estimated at `25,495 crore at a tax rate of 10%. In fact, for the relevant year 2018-19, the market capitalisation and tax revenue can be expected to be even higher. Thus, the author’s estimate of the revenue is grossly erroneous even on the basis of the Kelkar Direct Taxes Task Force estimate.
Furthermore, the author has indicated that the 2002 Kelkar’s report had advocated, inter alia, the abolition of LTCG tax and the introduction of the Securities Transaction Tax. To put the record straight, the recommendation for the abolition of LTCG in the 2002 Kelkar’s Report was in the context of several other measures like aligning the corporate tax rate to the top personal rate of 30%, immediate abolition of all tax incentives without any grandfathering and abolition of tax on dividend. However, the 2002 Kelkar’s report did not recommend the introduction of the Securities Transaction Tax.
As is clear from the foregoing paragraphs, the author appears to have based his estimates on incorrect appraisal of facts leading to findings which are prima facie misleading and may result in misconceptions.
Surabhi Ahluwalia, Official spokesperson, Central Board of Direct Taxes