The Hindu Business Line : Concessions come with a price

TAXING capital gains has always posed problems and given rise to controversies. There is a school of thought that argues that capital gains are artificial and not real. There is also a feeling that taxing capital gains will amount to taxing inflationary gains or involves double taxation.

While taxing gains arising out of transfer of immovable property has not raked up much controversy, taxing profits on share transactions has, as it involves issues relating to timeframe, the period of holding and the nature of the asset.

Treatment of bonus and rights shares require a separate law. In fine, the law gets compounded as stock market transactions get complicated.

In this situation, the Finance Minister's Budget speech abolishing long-term capital gains tax takes the controversy to a higher level.

Discrimination against mutual funds

The exemption granted for long-term capital gains from taxation and the reduction in the rate of tax for short-term capital gains go with a discriminatory announcements against mutual funds. Under the present law, gains arising on sale of equities will be treated as long-term capital assets if the shares are held for more than one year.

If the period of holding is less than one year, it is taken as short-term capital gains. Short-term capital gains are included in the total income for taxation at the rate applicable to the taxpayer.

Short-term capital loss can be set off only against gain from transfer of another short-term or long-term capital asset. Long-term capital loss can be set off only against long-term capital gains.

The present amendment can create transitional problems. It applies only to listed securities. It does not explain what will happen to unabsorbed long-term capital loss. How can they be set off and for what purpose? Probably, such losses are expected to be set off against gains from real estate.

The law regarding set off requires a change. Short-term capital gains were hitherto subjected to tax at the rate applicable to the total income. Since they will now be subject to the lower rate of tax at 10 per cent, the loss should be allowed to be set off against other incomes also.

It is not clear why the mutual fund industry has been chosen as a special target for higher levy and discrimination in respect of capital gains tax.

At a time when there was clamour for withdrawal of additional distribution tax, the levy is raised to 20 per cent for mutual funds. Their units are not listed in the stock exchange and, hence, will not get concession in the matter of capital gains tax.

This inequity has, however, been set right by the latest announcement by the Finance Minister to the effect that mutual funds unit will be treated on par with securities listed in the stock exchange in respect of the equity oriented funds. They will, therefore, not bear long-term capital gains tax and the short-term capital gains tax will be at 10 per cent.

The new regime of zero long-term capital gains tax will also affect restructuring of companies since buyback and open offers by promoters and others will not get the tax concession.

The concessions come with a price and there may be many who will be better off in the old system.

(The author is a former chief commissioner of income-tax.)

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