B.Ramana Kumar, M.Com., LLB, FCA, Advocate
Bias against assesses or manufacture – LTCG in budget 2018 & the premature FAQ
Advocate & Insolvency Professional
The budget 2018 has invoked a very mixed reaction amongst the stakeholders, particularly the so called middle class, individual assesses and the professionals.
One important bone of contention is the long term capital gains tax on the equities and equity based mutual funds. What was in the budget speech and what is in the amendment are completely two different matters.
In Para 155 of the speech of the Finance Minister deals with the rationale for reintroducing the LTCG into the tax arena after a period of about 13 years.
“….Major part of this gain (3.67K Crores of LTCG in AY 17-18) has accrued to corporates and LLPs. This has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets. The return on investment in equity is already quite attractive even without tax exemption. There is therefore a strong case for bringing long term capital gains from listed equities in the tax net…..”(Emphasis supplied)
Budget speech and the memorandum has very clearly indicated that the FM seeks to tax the long term capital gains arising out of securities and mutual funds for corporates and LLPs. This rational is so clearly explained to say that this investment in the financial assets of the country is a bias over in manufacture and this has been placed in the floor of the Parliament. Nowhere in the speech of the Finance Minister even indicated that this long term capital gains would be applicable for individuals, or the other class of assesses.
The extract of the Memorandum Explaining the Provisions in The Finance Bill, 2018 with respect to the amendment relating to the LTCG is as below (Page 5, last para)
“….Under the existing regime, long term capital gains arising from transfer of long term capital assets, being equity shares of a company or an unit of equity oriented fund or an unit of business trusts , is exempt from income-tax under clause (38) of section 10 of the Act. However, transactions in such long term capital assets carried out on a recognized stock exchange are liable to securities transaction tax (STT). Consequently, this regime is inherently biased against manufacturing and has encouraged diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these exemptions….” (Emphasis supplied)
Such being the case, there is a clear disconnect between the actual amendment proposed in the Act and the intention of the legislature. The legislature clearly wanted to tax only that part of the capital gain which was diverted by the Corporates and the LLPs against reploughing the same into the business and thereby expand the enterprise ; rather than to invest in the Equity and equity based MFs and earn a tax free income. With such an intention it is unnecessary for the amendment to cover any other class of assesses other than those intended.
This amendment is a fit one to be scrapped at the bill stage itself for the following reasons:
1. The STT regime is working fine and is accepted by all the stakeholders. It is because of this regime that the return on investment in equity is quite attractive. The Government is already enjoying the part of this attractive ROI.
2. A slight tweaking of STT is sufficient to achieve the desired result or more by the government, thereby reducing litigation to a large extent.
3. Keeping this promise in mind, many Indian investors have moved into investing into equity. This amendment betrays this belief and brings the atmosphere of uncertainty, which is against the principles of this government! Investments made by individuals during the regime of STT stands diluted and a heavy tax has to be paid by them for no fault.
An example may explain this. The investment in an SIP as on 31.1.2018 is say Rs. 10 Lakhs and the value Rs. 25 Lakhs. The withdrawal is made 5 years from now for the wedding of the assesses daughter / son. Value as on that day is Rs. 50 lakhs. The LTCG to be paid by the assesse on that day is Rs. 2.5 Lakhs + STT for the full value of the investment and the sale, being the difference in the NAV on the date of same and that of 31.1.2018. This is not what was promised when STT was introduced. This amounts to taxing 5% of the NAV as on the date of sale. This tax is not intended on the reading of the two documents, namely Finance Minister’s speech and the Memorandum Explaining the Provisions in The Finance Bill, 2018
Issue of FAQ by CBDT on This part fo the Finance Bill:
The FAQ issued by the CBDT on 4th February 2018 is one which could have been well avoided. Never in the history of the legislation, has an FAQ been issued at the bill stage itself. There are ample chances of the same being changed from the Bill to the Act. The decision of the Parliament in this regard would the ultimate and when the amendment is either changed or dropped, this FAQ would have very limited value.
Be it as may be, the FAQ does not address the main issue of whether the exemption of Rs.1 Lakh. It is still clear if the tax is applicable on the whole of the LTCG over and above the exemption of only for capital gains up to one lakh. This unnecessary and untimely “clarification” by the CBDT is premature, as it is before the bill is made into an act. Such as step was not indulged by the CBDT even when the draconian and failed FBT was introduced.
To conclude, this amendment will not only bring more litigation on an already settled and well administered issue, it will also being that amount of uncertainty in the tax laws which can well be avoided both for the assesses and the officers of the department.
The author is an Advocate practicing in Chennai and can be reached at firstname.lastname@example.org