Union Budget 2024: Simplification of capital gains tax structure is required, experts call for tax r

With Union Budget 2024 on the horizon, there is a growing expectation for adjustments to be made to the capital gains tax framework, particularly concerning stocks and real estate.

Budget expectations: Capital gains tax in India refers to the tax imposed under the Income Tax Act, 1961 on the profits generated from the sale of capital assets like stocks, land, buildings, vehicles, and securities.

In 2018, Finance Minister Arun Jaitley made the decision to reintroduce a 10% Long-Term Capital Gains (LTCG) tax on gains exceeding Rs 1 lakh, without providing indexation benefits. This move signified a notable departure from the previous regime established in 2004 under then Finance Minister P Chidambaram.

With Union Budget 2024 on the horizon, there is a growing expectation for adjustments to be made to the capital gains tax framework, particularly concerning stocks and real estate. The simplification and standardisation of this tax system have the potential to substantially affect investors and the overall economy. 

There are two categories of capital gains: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). STCG is applied when an asset is held for a period not exceeding specific durations, while LTCG is applied when the holding period exceeds those durations.

The duration requirements for different types of assets are as follows:

> For listed securities, units of UTI, equity-oriented funds, and zero-coupon bonds, if held for less than 12 months, STCG is applicable. Otherwise, LTCG is imposed.

> Shares of unlisted companies and immovable property (land/building) held for up to 24 months incur STCG. For durations exceeding 24 months, LTCG is applicable.

Experts have said the current capital gains tax regime is intricate and presents difficulties for investors due to various factors like asset classes, holding periods, tax rates, and residency status. To address these challenges, it is recommended that the government streamlines the classification of equity and debt instruments, unifies tax treatment for listed and unlisted securities, and simplifies indexation provisions.

"Simplification of capital gains tax structure is required. At present, the structure is complicated due to multiple factors such as varied rates of tax, holding period to qualify as long-term/ short-term, residential status of the taxpayer etc. Simplified capital gains tax structure may help enhance compliance by the taxpayers and reduce administrative burden on tax authorities to verify multiple fact points for computation of capital gains and taxes," said Shalini Jain, Tax Partner, EY India.

"Currently, the tax rates vary for short-term and long-term assets, depending on the type of capital asset and payment of applicable securities transaction tax. For listed shares, a holding period of 12 months qualifies as long-term, whereas for unlisted shares, it extends to 24 months. Similarly, listed debentures require a 12-month holding period for long-term status, compared to 36 months for unlisted debentures Equity-oriented mutual fund units achieve long-term status after 12 months, while it is 36 months for debt-oriented mutual fund units. Tax rates on capital gains range from 10%-30%, depending upon the nature of financial asset and holding period. To simplify tax regulations and ensure equity across equity and debt segments, it is expected that the law will be amended to consider all the types of financial assets as long-term capital assets after 12 months of holding. Additionally, a single tax rate for long-term and short-term capital gains should be introduced, regardless of whether the investment is equity or debt; listed or unlisted," said  Manoj Purohit, Partner & Leader, Financial Services Tax, Tax & Regulatory Services. 

"The Indian market is at a crucial juncture with potential tweaks to long-term capital gains (LTCG) and short-term capital gains (STCG) taxes on the horizon. The government needs to rationalize the tax structure to foster investment and growth. Currently, investors face multiple layers of taxation, including GST, exchange transaction tax, securities transaction tax (STT), and dividend tax, in addition to LTCG and STCG. It's unreasonable for one asset class to bear the burden of so many taxes, especially when investments are made from already taxed income. Streamlining these taxes would not only simplify the tax regime but also encourage greater participation in equity markets, driving capital formation and economic growth," said Manish Jain, Director of Institutional Business. 

Jain further noted a few recommendations for the Centre for capital gains tax

1. The government may increase the amount of capital gains which are not subject to tax since the limit of Rs 1 lakh has remained unchanged since its introduction in the Finance Act, 2018.

2. To simplify the provisions and reduce disparities, the government may consider taxing all long-term capital gains arising from transfer of securities, whether listed, unlisted, debt or equity, at 10 percent plus applicable surcharge and cess without benefit of indexation irrespective of residential status of the taxpayer.

3. Long-term capital gains, which refer to the profits made from the sale of listed equity shares and equity-oriented mutual funds held for more than one year, are exempt from taxation up to a limit of Rs 1 lakh.

4. The government may consider introducing a uniform holding period, such as 12 months, for all securities whether listed, unlisted, debt or equity for classification as short-term or long-term capital asset.

5. The government may also consider introducing a uniform holding period of 36 months for classification of all immovable and moveable assets other than securities.
Preeti Zende, founder of Apna Dhan Financial Services, said: “If the LTCG limit for deduction is raised from Rs 1 lakh to Rs 3 lakh, it would be a great relief. Secondly, the new tax started on debt mutual funds is detrimental to their growth. Investors demand that this new tax be reversed or at least that indexation benefit be restored for debt mutual funds.”

Source:- Business Today