Taxing proposition

Capital gains tax needs committee-level deliberations

The approach of the Union Budget inevitably raises the question of taxation, including capital gains tax. In the last week of November, the month that signals the start of the budgeting exercise, representatives from industry bodies met Union Finance Minister Nirmala Sitharaman to request rationalising the capital gains tax regime. This is not an unreasonable demand. Capital gains tax in India has been among the most complex regimes that is frequently altered and tinkered with in line with the economic policy outlook of the government. The rates and holding periods differ for different asset classes in confusing profusion. For instance, equity investments attract both long- and short-term capital gains tax, subject to certain conditions. There is long-term capital gains tax (LTCG, broadly defined as an asset held for more than 36 months) on equity and equity mutual funds of 10 per cent on capital gains of above Rs 1 lakh if held for more than 12 months. Short-term capital gains tax (STCG, for an asset held for less than 36 months, but again under 12 months or less for some assets like equity and MFs) similarly has differential rates, depending on whether securities transaction tax is applicable or not. At the same time, the thresholds for LTCG differ for land, buildings, and house properties, and for financial assets such as equity and bonds and so on. Similarly, capital gains tax on equity and debt mutual funds has multiple rates that apply to assets held before July 10, 2014, or effective from July 11, 2014. The policy of taxing dividends in the hands of the company or the shareholder has also changed frequently and confusingly. Indeed, the problems begin with the definition of capital assets. Agricultural land in rural India, for instance, is exempt from the category of a capital asset subject to distance from the nearest municipality and the distance must be measured aerially, and a population cut-off, which must surely be a controversial exercise in a country where the urban sprawl is expanding exponentially and population shifts between conurbations are a constant dynamic. All these definitions and exceptions have had the effect of expanding the businesses of chartered accountants at the cost of the ordinary investor’s comprehension. It has also created the unintended and undesirable consequence of causing savvy investors to leverage differential rates between asset classes for tax planning rather than investing on the merit of the asset. The bubbles in the real estate market are one manifestation of this trend.

Given this, it would be advisable, as outgoing revenue secretary Tarun Bajaj suggested in a recent interview with Business Standard, for the government to resist industry lobbies’ petitions to rationalise capital gains tax in the upcoming Budget, where other pressing concerns will occupy the minds of the government. There is a need for greater debate and discussion to seek ways to permanently simplify the regime and remove scope for constant tinkering, especially when any change in capital gains tax rates is bound to dissatisfy some group of stakeholder or the other. Overall, it would be advisable for the government to refer the matter to a committee of experts with the principal brief of simplifying the regime for ordinary investors. Cutting out the white noise of competing political agendas would amount to a real capital gain for this complicated tax regime.