The new draft Direct Taxes Code proposes to tax capital gains as regular income at normal tax rates, thereby removing the benefits of lower rates for long-term capital gains on sale of shares.
It is proposed that the Securities Transaction Tax be abolished and the exemption or relief granted to long-term and short-term gains on the sale of shares on the stock exchange be withdrawn.
Advancing the date for substituting the cost with the fair market value for computing from April 1, 1981, to April 1, 2000, is a welcome change. Thus, effectively appreciation in the value of assets between April 1, 1981, and April 1, 2000, will not be taxed.
The Code makes a distinction between investment assets and business capital assets. Gains on transfers of investment assets will continue to be taxed as capital gains but gains on transfer of business capital assets and slump sale will be taxed as business income. The concept of short-term and long-term capital assets is removed. The Code proposes indexation benefits for all types of investment assets which are held for one year or more.
The exemption for gains arising on the transfer of investment assets between a holding company and its wholly-owned subsidiary was available provided that the holding-subsidiary relationship was maintained and the transferee did not convert the asset into stock-in-trade for a period of eight years. The Code proposes to remove the cap of eight years; therefore, the exempted gain will be taxed whenever any condition is violated at any point of time without limitation. Mercifully, the gain will now be taxed in the year of violation and not revert to the year of original transfer.
The ratio of the Supreme Court’s decision in case of B C Srinivasa Shetty that if the cost of an asset could not be ascertained, the computation mechanism fails and the gain on the transfer of such an asset would not be liable to tax is sought to be nullified by proposing that the cost of acquisition shall be deemed to be “nil” in all cases where cost cannot be determined. Now the transfer of all investment assets including self-generated assets will be liable to tax.
The scope of income deemed to accrue in India is sought to be enlarged by including income accrued from the indirect transfer of a investment asset situated in India. This is an attempt to tax Vodafone type of overseas transfers.‘Business Reorganisation’ is now defined to mean the reorganisation of two or more residents, involving an amalgamation or a demerger. In view of the above, gains arising from reorganisation involving a foreign company may not be eligible for tax neutrality unless such company is regarded as resident under the expanded definition. The Code exempts gains arising on the transfer of investment assets under Business Reorganisation and in the hands of the shareholders.
In the case of amalgamation of companies, the losses of the predecessor can be set off by the successor, subject to compliance with the test of Continuity of Business. These conditions are now applicable also in cases of a demerger. The welcome change is that all types of losses are now eligible and the eligibility to carry forward losses is not restricted to companies having industrial undertaking which was required under the existing provisions. Also, the losses will be allowed to be carried forward for any number of years without limitation.
The discussion paper rightly suggests that the losses relating to the demerged undertaking will be allowed to the resulting company. However, s.61 of the Code provides that the entire loss of the demerged company will be available to the resulting company. This seems to be an anomaly in the relevant provisions of the Code.