FEBRUARY 27, 2018

By Nikhil Bhandari

THE storm that came on 1 st February 2018 in the form of the Finance Budget 2018 has blown the equity investors and the stock market. The Budget 2018 proposes to change the way LTCG on equity shares and units of equity-oriented Mutual funds are taxed in your hands. The new long-term capital gains [LTCG] tax regime will work for individuals selling equity or equity mutual fund units.

Existing LTCG tax regime

Under the existing regime, LTCG arising from transfer of long term capital assets (LTCA), being equity shares of a company/ unit of equity-oriented fund/ unit of business trusts, is exempt from income-tax. However, transactions in such LTCA carried out on a recognized stock exchange are liable to securities transaction tax (STT).

Proposed LTCG tax regime

The new LTCG tax regime is proposed to withdraw the above-mentioned exemption.

As per the proposed law, such LTCG shall be taxed at 10%but the tax liability will only accrue when such capital gains exceeds Rs. 1,00,000.

After 14 years the government has brought back the tax on LTCG on equity oriented shares and units of mutual funds as the existing tax regime was inherently biased against manufacturing sector units and encouraged the diversion of investment in financial assets. This also led to significant erosion in the tax base resulting in revenue loss for the government. The problem was further compounded by abusive use of tax arbitrage opportunities created by these types of exemptions.

As per the reports and statistics, the government was losing Rs. 50,000 crore every year on account of non-imposition of LTCG tax. So, after demonetisation and GST this step was expected to be taken by the government to shore up the tax revenues.

Scenarios

Let's take few scenarios to understand the new tax regime:

* The long-term capital gain of Rs. 50 (Rs. 250 – Rs. 200) will be exempt from the tax as the share is sold after 31 st Jan 2018 but before 1 st April 2018.

Clarifications & Impact

The income tax department clarifies that the capital gains on listed equities arising up to January 31, 2018 for resident and non-resident assesses have been grand fathered. The exempted category also includes foreign institutional investors (FIIs).

The grand fathered concept implies that all the gains until January 31 will be exempt from any tax. This only means that the income tax will be implied with prospective effect and not with retrospective effect.

LTCG on equity shares or mutual funds is the profit that one realises by selling the equity shares or dissolving their mutual funds that one has held for more than a year. Similarly, if you sell for less than what you paid to purchase the asset it will be considered as Long-term capital loss [LTCL].

Some other important clarifications:

- As the exemption from LTCG will be available for transfer made between 1st February 2018 and 31st March 2018, the LTCL arising during this period will not be allowed to be set-off or carried forward.

- LTCL arising from transfer made on or after 1st April 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act.

- Therefore, it can be set-off against any other LTCG and unabsorbed loss can be carried forward to subsequent eight years for set-off against LTCG.

The first impact of this new tax regime was seen in the stock market as the both indices of BSE (Sensex) and NSE (Nifty) fell drastically, between the plummeting rates of Fixed Deposits (FD) and high rates of real estate, mutual funds were the only option of investment for the middle class of this country.

Taxation on mutual funds can be a real repeller for the equity investment industry as the most attractive part of the mutual funds was the tax-free income which will be changed with the new tax regime.

(The author is Assistant Manager - Direct Tax at International Business Advisors, New Delhi and the views expressed are strictly personal.)