Under the existing regime, long term capital gains arising from transfer of long term capital assets, being equity shares of a company or a unit of equity oriented fund or a unit of business trust, is exempt from income-tax under clause (38) of section 10 of the Act. However, transactions in such long-term capital assets are liable to securities transaction tax (STT). Consequently, this regime is inherently biased against manufacturing and has encouraged diversion of investment to financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these exemptions.

In order to minimise economic distortions and curb erosion of tax base, it is proposed to withdraw the exemption under clause (38) of section 10 and to introduce a new section 112A in the Income-tax Act, 1961 (‘the Act’) vide clause 31 of the Finance Bill, 2018 so as to provide that long-term capital gains arising from transfer of such long-term capital asset exceeding one lakh rupees will be taxed at a concessional rate of 10 percent.

Since the introduction of the Finance Bill, 2018 on 1st February, 2018, several queries have been raised in different fora on various issues relating to the proposed new tax regime for taxation of long-term capital gains. The responses to these queries are provided below.

Q1) What is the meaning of long-term capital gains under the new tax regime for long-term capital gains?

Ans 1. Long term capital gains mean gains arising from the transfer of long-term capital asset. The Finance Bill, 2018 proposes to provide for a new long-term capital gains tax regime for the following assets– i. Equity Shares in a company listed on a recognised stock exchange; ii. Unit of an equity oriented fund; and iii. Unit of a business trust. The proposed regime applies to the above assets, if– File No. 370149/20/2018-TPL Page 2 of 6 a. the assets are held for a minimum period of twelve months from the date of acquisition; and b. the Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of equity shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition (subject to notified exemptions).

Q2) What are the modes of acquisition of equity shares which are proposed to be exempted from the condition of payment of STT?

Ans 2. The Central Government had exempted certain modes of acquisition of equity shares for the purposes of clause (38) of section 10 of the Act vide notification no. 43/2017 dated 5th of June, 2017. This notification is proposed to be reiterated for the purposes of clause 31 of the Finance Bill, 2018 after its enactment.

Q3) What is the point of chargeability of the tax?

Ans 3. The tax will be levied only upon transfer of the long-term capital asset on or after 1 st April, 2018, as defined in clause (47) of section 2 of the Act.

Q 4) What is the method for calculation of long-term capital gains?

Ans 4. The long-term capital gains will be computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset.

 

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