Tax on LTCG u/s 112A Vs Tax on LTCG Prior to Finance Act 2018

Taxation of Long Term Capital Gain (LTCG) under section 112A vis a vis Taxation of Long term Capital Gain Prior to Finance Act, 2018

We all saw an Havoc amongst taxpayers when Finance Act, 2018 was announced in the union budget speech specifically among those assessees whose major part of their total income consisted of profit from sale of assets being listed equity shares of a company or equity oriented mutual funds or units of business trust due introduction of new section 112A and abolishment of Section 10 (38).

Prior Finance Act, 2018 income from sale of long term capital asset being listed equity shares or equity oriented mutual funds or unit of a business trust was exempt u/s 10(38) [i.e. Not liable to tax] provided STT has been paid on the transfer of such shares/units. With the introduction Section 112A income from sale of long term asset being listed equity shares & equity oriented mutual funds was brought under taxation if the total gain from such sale exceeds Rs.1,00,000/-, for the sake of reader’s ready reference I would like to reproduce extract of Section 112A :

112A. (1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if—

(i) the total income includes any income chargeable under the head “Capital gains”;

(ii) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust;

(iii) securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004) has,—

(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.

(2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of—

(i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent; and

(ii) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains referred to in sub-section (1) as if the total income so reduced were the total income of the assessee.

Now the question arises whether the introduction Section 112A is beneficial or it is an additional burden for taxpayers?

In this article I will point out few of the inconvenience faced by taxpayers prior to introduction of Finance Act, 2018 while computing their income from capital gain which to some extended has been simplified thereafter by introduction of Section 112A, I will also point out few drawbacks of Section 112A and will leave on to the readers to decide whether the amendment was beneficial or burdensome.

Inconvenience No. 1: Non Availability of date of purchase of Old or Inherited Shares:

We all know to compute income from capital gain we were required date of acquisition (for the purpose of indexation), however many taxpayers were unaware of date of purchase of too old shares specially when those were purchased in Non-DEMAT form (Physical form) or were inherited or were gifted by previous owner due to which one cannot calculate indexed cost of acquisition (to take care of inflation effect in the economy) hence created difficulty in computation of capital gain.

Solution: Finance Budget, 2018 has introduced a term called ‘Grandfathering Cost’ which is your Cost of Acquisition.

The cost of acquisition for the purposes of computing capital gains referred to in sub-section (1) of 112A in respect of the long-term capital asset acquired by the assessee before the 1st day of February, 2018, shall be deemed to be the higher of—

(i) the actual cost of acquisition of such asset; and

 (ii) the lower of—

(a) the fair market value of such asset; and

(b) the full value of consideration received or accruing as a result of the transfer of the capital asset.

What we can figure out from above provision is even though a person is unaware of date of acquisition of such asset but he is certain that such assets were acquired before 1st February, 2018 then he may consider FMV as on 31st January, 2018 quoted on Stock Exchange which is readily available as Cost of Acquisition for computing Capital Gains.

Inconvenience No. 2: Prohibition on Set off or Carry Forward of Losses incurred on sale of Long Term Capital Asset being listed equity shares or equity oriented mutual funds or units of business trust prior to Finance Act, 2018:

Before introduction of section 112A capital gain on sale of long term capital asset being listed equity shares or equity oriented mutual funds or units of business trust was exempt u/s 10(38) and so the losses on such transfer were not allowed to be setoff in the same Assessment year or Carry Forward in subsequent years as a result tax payers who suffered a loss were not benefited under Tax Laws for the losses incurred. Such loss in layman’s language is known as ‘Dead Loss’.

Solution: With the introduction of Section 112A capital gain on sale of asset being listed equity shares or equity oriented mutual funds or units of business trust is brought to tax on gains exceeding Rs. 1,00,000/- as a result any loss suffured by tax payer on such transfer can be setoff in the same year or carried forward in subsequent years upto 8 assessment years

[Note: U/s 74 Long Term Capital Loss can be setoff against Long Term Capital Gain only]

Now let us discuss few drawbacks of Section 112A,

Drawback No. 1: Taxability of Capital Gains exceeding Rs. 1,00,000/- @10% :-

There are huge number of people who are dependent on stock trading for earning their livelihood, they purchase/sell stocks and units in huge numbers based on their knowledge about stock market, prior to introduction of Section 112A they used to enjoy exemption from tax u/s 10(38) on their capital gains earned from sale of long term asset being listed equity shares or equity oriented mutual funds or units of business trust. With introduction of Section 112A they are required to pay tax @10% on gain amount exceeding Rs. 1,00,000/-.

Drawback No. 2: Double taxation:-

STT is a direct tax levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India. STT is governed by Securities Transaction Tax Act (STT Act) and STT Act has specifically listed down various taxable securities transaction.

Taxing the gains u/s 112A leads to double taxation for a single sale transaction viz. FIRST when STT is paid on sales consideration & SECOND when gains exceeds Rs.1,00,000/-. Hence assessee is required to bear tax incidence twice.