March 15, 2018

The central government has disappointed on the across-the-board relief on long term capital gains (LTCG) tax, but gave some cheer to the investors of the companies whose shares have been listed after January 31, 2018, by allowing indexation benefit.

This was part of the amendments to the Finance Bill passed by Lok Sabha on Tuesday. However, there is no change in the LTCG tax on the other listed securities.

The companies listed on the stock exchanges after January 31 (from February 1, 2018) will get the benefit of the "cost inflation index" taking into account the impact of inflation on acquisition cost. Capital gains from these transactions will continue to be taxed at 20%. LTCG on sale of unlisted shares is taxed at 20%, while short-term capital gain tax on it is 30%.

In the Budget 2018-19, finance minister Arun Jaitley introduced the LTCG tax of 10% on gains exceeding Rs 1 lakh made from the sale of listed shares or mutual fund, without allowing any indexation benefit. The gains made from the sale of shares bought till January 31 will be grandfathered, i.e. exempt from the LTCG tax. In case of unlisted entities, the capital gains accrued till January 31 will be grandfathered along with indexation benefit.

Currently, the investors have to pay 15% short-term capital tax on the sale of listed shares or the equity mutual fund within a year of purchase. From April 1, 2018, 10% tax will be levied on the capital gains made on the sale of listed equity shares exceeding Rs 1 lakh if sold after April 1. The stock market investors were hoping for some relief on the LTCG tax front. The government had received requests to withdraw the tax imposed on the long-term gains.

The amendment seeks to provide the fair value of shares which are unlisted on January 31, 2018, but listed on date of transfer shall be indexed as per cost of acquisition.

Rajesh H Gandhi, partner at Deloitte India, said in a statement, "Equity shares and units which were unlisted as on January 31 will also get the benefit of higher cost though in different ways. While in the case of unlisted units, the FMV on January 31 can be substituted, for the purpose of unlisted shares, the benefit of cost inflation during the period from the date of purchase up to January 31 can be considered resulting in a lower capital gains tax. This is an easier way of giving grandfathering benefit for unlisted shares rather than asking for a valuation of unlisted shares and will help shareholders of companies like NSE which could be listed in the future."

The government also introduced an amendment in the Finance Bill in the Government Savings Promotion Act to ensure that the Public Provident Fund (PPF) accountholders continue to enjoy protection from the attachment. The PPF deposits will not be attached in case of a loan default or any other liability incurred by the depositor, as per the amendment.

In a breather for start-ups, the "criterion for claiming 100% deduction of profits has been relaxed. Earlier, start-ups were allowed 100% deduction of profits for any three out of seven years from the year of incorporation," said Jiger Saiya, partner at BDO India. The start-ups were required to comply with the condition which stipulated that turnover cannot exceed Rs 25 crore in seven years from the date of incorporation. This was considered restrictive as exceeding the turnover threshold in later years could have jeopardised the claim for earlier years. "The condition has now been relaxed largely to the effect that the turnover should not exceed the prescribed limit for the year for which 100% deduction is claimed by the start-up," said Saiya in a statement.

NO CHANGE FOR LISTED FIRMS

  •     Currently, the investors have to pay 15% short-term capital tax on the sale of listed shares or the equity mutual fund within a year of purchase  
  •     From April 1, 2018, 10% tax will be levied on the capital gains made on the sale of listed equity shares exceeding Rs 1 lakh if sold after April 1

[Daily News and Analysis]