The Finance Act 2018 withdraws the exemption of long-term capital gains (LTCG) arising from transfer on or after April 1, 2018 of listed equity shares of a company or a unit of an equity oriented mutual fund or unit of business trust (specified assets).
The intent of introducing the tax on LTCG was to discourage investment of business surplus in financial assets as compared to in manufacturing. The total amount of exempted capital gains from listed shares and units is around Rs 3,67,000 crore as per returns filed for AY 17-18, and a major part of this gain has accrued to corporates and LLPs.
Further, with the reforms introduced by the government and incentives given so far, the equity market has become buoyant. BSE Sensex increased by 445% from 6,602 in 2004 to 35,906 in 2018.
The long-term capital gains on sale after April 1, 2018 of these specified assets are taxable only in excess of Rs 1 lakh during the financial year, at the concessional rate of tax of 10% as per section 112A of the Act plus applicable surcharge and cess.
An Individual/HUF should be able to take relief of slab-wise taxation of such long-term capital gains.
Such concessional rate of tax of 10% is applicable where STT has been paid on: notified acquisition and transfer of equity share in a company, or transfer of unit of equity oriented fund or a unit of a business trust.
The LTCG on sale of specified securities is to be computed without giving effect to cost inflation indexation benefit (except for unlisted shares) or foreign currency fluctuation benefit.
The Finance Minister recognised that a vibrant equity market is essential for economic growth, and so he proposed for grandfathering of capital gains till January 31, 2018.
The grandfathering of capital gains is provided by giving a step-up to the cost of acquisition of the specified securities so that the upside in the market value till January 31, 2018 is not taxed.
The mechanism proposed for determining the cost of acquisition of specified asset acquired before February 1, 2018, shall be higher of:
The actual cost of acquisition of such asset; and
Lower of
The fair market value of such asset; and
The full value of consideration on the transfer of the capital asset
The fair market value means:
Highest price of the specified capital asset e.g equity shares on the stock exchange on January 31, 2018;
Net asset value of unlisted unit as on January 31, 2018;
Cost inflation index from the year of purchase till 2017-18 in case of unlisted equity shares subsequently listed.
When the Finance Bill 2018 was passed by the Lok Sabha, an amendment was made to the provisions, whereby cost inflation index benefit was to be taken as the fair market value for unlisted equity shares which are subsequently listed.
Though the long-term capital gains on sale of specified assets are brought to tax at a marginal rate of tax of 10% plus surcharge and cess, the gains till January 31, 2018 are grandfathered which is a big relief.
Long-term capital loss can now be allowed to be set off. However, now the taxpayers will be required to maintain documentation and compute the gains and disclose the same in the return of income.
(The writer is Partner at Deloitte India)
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