It is that time of the year again when government officials are working frantically to make final changes to the Union Budget 2018-19, industry pundits are taking their bets on what to expect, and various interest groups are making fervent last minute pitches to have their recommendations incorporated. Expectations about rationalisation of tax rates are high among individuals and corporates, while economists are closely tracking adherence to fiscal discipline. Amidst all the voices, the investment community too is looking forward to clarity on a few issues.
Long-term capital gains – will the yearly debate come to a close?
At present, capital gains on listed securities are exempt from tax, provided, the security has been held for more than a year and the Securities Transaction Tax has been paid on both purchase and sale transactions. With Indian public equity markets experiencing a sustained bull-run for the past few years, the on-going debate on taxability of capital gains on listed securities has gained fresh momentum in the build up to the Union Budget.
Constant pressure on the government to augment tax receipts, absence of comparable international jurisprudence, resultant inequitable tax treatment to other assets classes such as real estate and gold, make a case for a re-look at this exemption. However, any move to tax capital gains is likely to evoke sharp reactions and the possibility of a downward correction of the markets could be one repercussion. Alternatives such as extending the prescribed holding period from one to three years, making exemption subject to reinvestment of capital gains, or capping the exempt gains to a prescribed amount, may be considered by the government to neutralise the possibility of a negative impact. Investors will keenly watch the upcoming Union Budget 2018-19 to see if the government finally walks the tightrope and deals with the issue of taxability of capital gains.
Cryptocurrencies – Need for clarity
The rate of growth in the value of cryptocurrencies and the surrounding tax and regulatory issues have constantly tried to outpace each other in the past year. From an Indian policy standpoint, the government is evaluating a report by an expert committee on the existing global regulations governing crypto currencies and the central bank has repeatedly cautioned public of the inherent related risks. As per reports, the government is even toying with the idea of launching its own cryptocurrency and while that maybe one reality, the other is the Income-tax department recently launching search operations at various cryptocurrency exchanges across the country with notices being issued to individuals on the basis of information collected.
In the absence of any clear regulation in India, ambiguity remains on the legality and other issues like taxability which investors would wish to be addressed in the Union Budget 2018-19. The primary issue of classification as a currency or a capital asset would need to be addressed by the central bank and will form the basis of determining taxability. Other potential issues include taxability of income as capital gains or business income which, inter-alia, can be determined by the intention of the purchaser and the frequency and volumes of trading. Being intangible, cryptocurrencies are devoid of specific identification and issues like determination of cost of acquisition and period of holding of the cryptocurrency sold requires clarification. Applicability of the First In, First Out (FIFO) method to resolve such issues, in line with dematerialised securities, requires specific clarification.
Other challenges such as requirement to pay advance tax on gains realized during the year, determining the situs of cryptocurrencies, taxability in India of trades implemented by non-residents through Indian exchanges and taxability in the hands of cryptocurrency miners also require detailed guidelines. Given the ambiguity around regulations applicable to crypto currencies, any clarification in the upcoming budget will be closely watched by global investors and governments alike.
Joint Development Agreement (JDA) – Room for more
Union Budget 2017-18 put to rest a lot of controversies surrounding the taxability of JDAs. However, issues such as application of the relevant provisions to companies, clarification on counting holding period till issue of completion certificate, considering stamp duty value on the date of agreement as sale consideration and provision for taxability upon receipt of completion certificate as against its issue, require attention. Resolution of the above issues in the upcoming Budget can provide cheer to the housing sector.
The Union Budget 2018-19 requires the government to perform a formidable balancing act between the looming risk of fiscal slippage and the aspirations of over a billion people for a better quality of life. Attention to the above tax issues could help provide the much needed certainty in an otherwise dynamic global environment.
The author is Partner and Chief Operating Officer (Tax), KPMG in India