Introduction: Delve into the intricacies of the Union Budget 2018’s decision to eliminate Section 10(38) of the Income Tax Act, a provision that once granted exemptions on long-term capital gains. Introduced in 2004 to boost stock market investment and encourage long-term equity holding, the section became a target for exploitation. This article unveils the rationale behind the government’s move, highlighting the misuse of the provision and the subsequent measures taken to safeguard tax revenue.
Section 10(38) aimed to incentivize long-term investments in equity shares by providing an exemption on capital gains. However, opportunistic taxpayers discovered a loophole. Exploiting this, they established shell companies issuing shares at nominal prices, invested in these entities, and manipulated share prices without market factors. These orchestrated transactions, aimed at evading taxes and laundering money, were pre-arranged and structured. The negligible business activity in these shell companies did not align with the rise in share prices.
By rigging share prices, these taxpayers secured higher profits on their shares, selling them on the stock exchange. The substantial capital gains from these transactions were exempted under Section 10(38), causing consistent revenue losses for the government. This prompted the removal of the section in the Union Budget 2018, closing the door on this avenue for tax evasion.
While the government strives to provide legitimate relief to taxpayers, it also confronts individuals seeking to exploit loopholes for tax evasion. The removal of Section 10(38) was a countermeasure to curb the misuse of the provision and prevent the conversion of black money into white through orchestrated transactions.
Conclusion: The removal of Section 10(38) in the Union Budget 2018 was a strategic response to curb tax evasion and protect government revenue. The exploitation of this provision through orchestrated transactions involving shell companies necessitated stringent measures. While there may be discussions about reintroducing similar provisions, it is crucial for the government to carefully evaluate the potential impact and ensure the integrity of the tax system. The crackdown on bogus companies, either liquidated or struck off by the Registrar of Companies (ROC), underscores the government’s commitment to closing loopholes and maintaining a robust tax framework.
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