Background:-As a step towards simplifying, consolidating and bringing about structural changes in direct taxes, the new Direct Taxes Code (DTC) Bill 2009 has been released for public debate. This alert summarizes certain key provisions proposed in the DTC relating to capital gains.
Scope of taxation
Classification of assets
The definition of Capital asset continues in DTC. However the DTC classifies assets into two broad categories i.e. investment assets, and business assets. DTC envisages taxing income from transfer of investment assets as capital gains. Under the Income Tax Act 1961 (“Act”), income from transfer of capital assets even if used for business purposes was taxed as capital gain. DTC proposes to tax income from transfer of business capital assets as “business income” and the scope of definition of transfer is expanded to include business assets also.
Expansion of transfer:- The definition of the term “transfer” for the purpose of DTC has been consolidated and widened. The following are included within the scope of transfer:
Withdrawal of exemption from transfer :- DTC has proposed to widen the ambit of taxation by withdrawing the exemptions provided by the Act for certain transactions from the ambit of transfer. Significant among them are :
• Specific exemption has been given for conversion of an unincorporated body (including a Limited Liability Partnership) to a company.
• Capital gains arising from transfer of personal effects, rural agricultural land and Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 are tax free.
Year of taxability – certain inclusions:- The year of taxability for the following transfers has been specifically included under the DTC. When the transfer is on account of:
Computation of capital gain
Non-resident taxation :-In an attempt to expand the source basis of taxation, the DTC is proposing to include indirect transfer of capital asset situated in India as deemed to accrue in India. Hence, even if there is a transfer between two non-residents of a capital asset which derives value from India, then, the same may be taxable in India.
Special computation provisions in the Act, for non-residents with regard to acquiring shares and debentures in foreign currency do not find place in the DTC.
Re-characterization of Capital gains to business income:- Profit on sale of an undertaking on a slump sale basis will be taxed as business income as against the existing practice of taxing such income as capital gains. In effect, per DTC, transfer of business capital assets, profit / loss arising thereon would be taxable as business income.
Relief for rollover of investment asset:- The DTC proposes to minimize the exemption provided on capital gains both in terms of eligible tax payers as well as on the type of reinvestment options.
Rollover benefits arising from reinvestment of sale consideration for claiming capital gains exemption has now been restricted to individuals and Hindu undivided families. Other assessees earning capital gains income even if reinvested would not be entitled for any exemption. The amount of relief of capital gains will be determined in proportion to amount invested to net consideration.
The eligible assets/schemes have also been narrowed down and only investments in agricultural land, residential house and deposit in capital gain savings scheme will be eligible for roll over benefit. DTC requires the tax payer to roll over the net consideration by investing in agricultural land, residential house or deposit in capital gains savings scheme.
The following are some of the conditions attached to roll over of net consideration:
Miscellaneous DTC proposes to allow indefinite carry forward of Capital loss to the subsequent financial years with the only precondition being filing of return on time. Brought forward capital loss can be set off only under the head capital gains and not against any other head of income.
Under the DTC, capital gains for all categories of resident tax payers will be included in their total income and taxed at normal progressive rates applicable to them as against a flat rate of 30% for non-residents.
Capital gains will be treated as a special source income in the case of non-resident tax payers.
The DTC requires taxes to be deducted at source at the rate of 10% in the case of residents and 30% for non-residents. This is a marked change as compared to the Act which provides for advance tax as the mode of settling the tax liabilities for residents and for FIIs. Consequently, compliance with the statutory withholding provisions is triggered at the time of transfer itself.