India Clarifies Capital Gains Tax Changes
India’s Central Board of Direct Taxes (CBDT) has released further information on the long-term capital gains tax announced in the recent budget, in the form of a list of answers to frequently asked questions.
Explaining the change, the CBDT noted that, under the existing regime, 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 business trust, was exempt from income-tax under clause 38 of Section 10 of the Income-tax Act, 1961.
However, transactions in such long-term capital assets are liable to securities transaction tax (STT). Consequently, CBDT said, the regime was biased against manufacturing and encouraged diversion of investment to financial assets. It had also led to significant erosion in the tax base. The problem was further compounded by abusive use of tax arbitrage opportunities created by these exemptions, it added.
To minimize economic distortions and curb erosion of tax base, the Budget proposed to withdraw the exemption under clause 38 of Section 10 and to introduce a new section 112A in the Act through clause 31 of the Finance Bill, 2018, so as to provide that long-term capital gains arising from transfer of such long-term capital asset exceeding INR100,000 will be taxed at a concessional rate of 10 percent.
The CBDT said, since the introduction of the Finance Bill, 2018, on February 1, 2018, several queries had been raised on various issues relating to the proposed new tax regime for taxation of long-term capital gains. The CBDT decided therefore to answer a total of 24 queries received in the new document.
Key clarifications by the CBDT include that the tax will be imposed only on long-term capital asset transfers that take place on or after April 1, 2018, and will be calculated by subtracting the cost of acquisition (on or before January 31, 2018) from the full value of the consideration on the asset transfer. Gains accrued up to January 31 will continue to be exempt.
The new tax will not be deducted at source where the gains are realized by a resident taxpayer or a foreign institutional investor (FII), but will be deducted in the case of long term capital gains accruing to a non-resident taxpayer.