The proposed long-term capital gains tax on equity holdings will apply on profits made from sale of shares on or after April 1, 2018, the government said on Monday.
While the tax will kick in on shares sold on or after April 1, the acquisition cost for the purpose of computing the capital gains will be the higher of the actual purchase price or the maximum traded price on January 31, it said.
As stock prices continued to take a beating, the government explained the new levy in form of Frequently Asked Questions (FAQs), reasoning that exempting long-term gains from share sale from any tax was inherently biased against manufacturing and encouraged diversion of investment to financial assets.
“The new tax regime will be applicable to transfer made on or after April 1, 2018 (and) the transfer made between February 1, 2018, and March 31, 2018, will be eligible for exemption under clause (38) of section 10 of the Act,” the FAQ said.
At present, India imposes a 15% on short term capital gains made from the sale of shares within a year of purchase. However, gains made after a year of purchase is exempt from the levy.
The levy would apply to equity shares of a listed company, unit of an equity oriented fund and unit of a business trust. These assets must have been held for a minimum period of 12 months from the date of acquisition.
{{/usCountry}}The levy would apply to equity shares of a listed company, unit of an equity oriented fund and unit of a business trust. These assets must have been held for a minimum period of 12 months from the date of acquisition.
{{/usCountry}}“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,” the FAQ said. The cost for shares acquired on or before January 31, 2018, will be the actual cost. But “if the actual cost is less than the fair market value of such asset as on January 31, 2018, the fair market value will be deemed to be the cost of acquisition,” according to the FAQ.
For listed equity share or unit, “the fair market value means the highest price of such share or unit quoted on a recognised stock exchange on January 31, 2018,” it said.
In the case of an unlisted unit, the net asset value of such unit on January 31, 2018, will be the fair market value.
Long-term capital gains exceeding Rs 1 lakh from sales of shares made on after April 1, 2018, will be taxed at 10%. However, there will be no tax on gains accrued upto January 31, 2018, it added.
Prior to the Budget announcement, long-term capital gains arising from the transfer of long-term capital assets, being equity shares of a company or a unit of equity oriented fund or a unit of a business trust, was exempt from income-tax under clause (38) of section 10 of the Act.
However, transactions in such long-term capital assets were liable to securities transaction tax (STT).
“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 the abusive use of tax arbitrage opportunities created by these exemptions,” the FAQs stated.
The exemption has now been withdrawn to minimise economic distortions and curb erosion of tax base, it added.
The FAQ, however, said that the long-term capital loss arising on account of share sale between February 1, 2018, and March 31, 2018 will not be allowed to be set off or carried forward.
“Long-term capital loss arising from a transfer made on or after April 1, 2018, will be allowed to be set-off and carried forward in accordance with existing provisions of the Act,” it added.