In order to minimize economic distortions and curb erosion of tax base, it has been proposed in Union Budget 2018-19 to withdraw the exemption under clause (38) of section 10 of the Income Tax Act, 1961(for short ‘the Act’) and to introduce a new section 112A in the Act to provide that long term capital gains arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at 10 % of such capital gains exceeding Rs. 1,00,000.
After section 112 of the Act, the following section is proposed to be inserted with effect from the 1st day of April, 2019, namely:-
“112A. (1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if-
(i) the total income includes any income chargeable under the head “Capital gains”;
(ii) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust:
(iii) securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004, has.-
(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or
(b) in a case where the long–term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.
(2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of-
(i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent.; and
(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee:
Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.
(3) The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on a recognized stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.
(4) The Central government may, by notification in the Official Gazette, specify the nature of acquisition in respect of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall not apply.
(5) The capital gains under sub-section (1) shall be computed without giving effect to the provisions of the first and second provisos to section 48.
(6) The cost of acquisition for the purposes of computing capital gains referred to in sub-section (1) in respect of the long-term capital asset acquired by the assessee before the 1st day of February, 2018, shall be deemed to be the higher of-
(i) the actual cost of acquisition of such asset; and
(ii) the lower of-
(a) the fair market value of such asset; and
(b) the full value of consideration received or accruing as a result of the transfer of the capital asset.
(7) Where the gross total income of an assessee includes any long-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.
(8) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.
Explanation.- for the purposes of this section,-
(a) “equity oriented fund” means a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10 and,-
(i) in a case where the fund invests in the units of another fund which is traded on a recognized stock exchange,-
(A) a minimum of ninety per cent. of the total proceeds of such fund is invested in the units of such other fund; and
(B) such other fund also invests a minimum of ninety per cent. of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange:
(ii) in any other case, a minimum of sixty-five per cent. of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange:
Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;
(b) “fair market value” means,-
(i) in a case where the capital asset is listed on any recognised stock exchange, the highest price of the capital asset quoted on such exchange on the 31st day of January, 2018:
Provided that where there is no trading in such asset on such exchange on 31st day of January, 2018, the highest price of such asset on such exchange on a date immediately preceding the 31stday of January, 2018 when such asset was traded on such exchange shall be the fair market value;
(ii) in a case where the capital asset is a unit and is not listed on a recognised stock exchange , the net asset value of such asset as on the 31st day of January, 2018;
(c) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005;
(d) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43.”
Long Terms Capital Gains on equity shares proposed in the Finance Bill, 2018 may prove to be dangerous for the investments in the stock market of India. Large investors of India as well as the FIIs (Foreign Institutional Investors) may opt out from the Indian Capital Markets.
It is the credentials of the ruling BJP party that has given new heads to BSE and Nifty indexes. The flourishing Indian Share Markets attract foreign investments as well as give new dimensions to industrial growth. The declining share markets may dampen prospects for easy victory for BJP in Lok Sabha elections in 2019. The recent crash in share markets after the budget presentation has evaporated crores of wealth of investors.
Rising collections by Mutual Funds as well as the growth of insurance sector is, to a great extent, in the recent past can be attributed towards the rising Capital markets of India. Also, share markets are the hub of the economic growth of a country. Indian Capital Markets in the recent past have superseded the foreign capital markets in terms of growth.
The proposed LTCG provisions can be withdrawn as there are other avenues for raising the funds via taxes, minimizing economic distortions and curbing erosion of tax base for the Government of India.