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How to make changes with least amends: Memani

Capital gains tax on sale of securities makes a homecoming in the form of MAT, writes Rajiv Memani CEO, Ernst & Young.

india Updated: Mar 01, 2006 15:50 IST

TheFinance Minister’s speech alluded to minimal changes on the direct tax proposals and generally you could expect that he has decided to keep the In dian juggernaut rolling without making too many amends on the direct tax front.

But a brief glance at the fine print raises enough doubts to believe that his deft hands can make significant changes with least amends. Some of these relate to the changes that are proposed in relation to minimum alternate tax (MAT) and the exemption that was hitherto available to investors in the infrastructure sector.

For the corporate taxpayers who, till yesterday, rejoiced in the fact that their income from long-term capital gains on sale of equity shares on stock market or equity oriented funds was not subject to tax, they may suddenly be looking to a potential tax of 11.22% (including surcharge, cess) on book profit that would arise on such gains. In a single stroke, the Finance Bill proposes to blur the difference in the tax impact on the capital gains by a holding company on the sale of its investments in a listed subsidiary, whether the transaction is culminated as a long-term sale over the stock exchange, a long-term sale outside the stock exchange or as a short-term sale over the stock exchange.

The capital gains tax on sale of securities thus makes a homecoming, at least for the corporate shareholders, in the form of MAT. The giveaway for all of the above is that MAT will remain creditable against future tax for a proposed period of seven years against the existing five years. One wonders whether this will also resurrect the doubts on applicability of MAT to foreign com panies. This may not augur well for the foreign investor community.

The bill also proposes to do away with the exemption that was available to investors under Section 10(23G) on income from deemed dividends, long-term capital gains and interest from shares or long-term finance provided to various approved infrastructure projects. This proposal is dichotomous to the accepted theme that investment in the infrastructure sector needs a bolster, if India has to sustain and achieve the goals of a 10% growth.

The bill proposes to amend Section 80IA to extend the time-limit for tax holiday on industrial parks to March 31, 2009 and on power generation, distribution or transmission to March 31, 2010. What is alarming is that the existing exemption under Section 10(23G) is not even grand fathered and all benefits, which are available as of date to approved projects, would be lost come March 31, 2006. It is probably suggesting that accretion to the value of existing investments in such projects should be booked and gains claimed exempt before the sunset of March 31, 2006. This proposed deletion of the exemption is even more perplexing in the context of the SEZ Act, very recently promulgated, which proposes to extend this benefit.

The individual tax payer can, however, breathe easy as the tax rates remain unchanged. Contributions by employers upto Rs 100,000 to superannuation fund would not be subject to the FBT, while the employee can now claim a benefit of his own contribution to a pension fund upto Rs 100,000 under section 80C of the Act.

(Rajiv Memani, is CEO, Ernst & Young)