What is capital gains tax and which category of taxpayers is most affected by it?
Capital gains arise on transfer of capital asset. Such a gain attracts capital gains tax, which is part of direct taxes. Capital assets include property, securities, mutual funds, insurance policies and other specified physical assets.
Capital gains tax can be short-term or long-term, depending on the holding period, and it could vary from one asset to another. For example, for listed equity, short-term means 12 months, while it is 24 months for unlisted shares of a company or an immovable property including land or building or both.
From the definition it is clear that investors of all types, from individual to institutional, will be impacted by any change in capital gains tax norms. But since it is mainly the relatively wealthy who use investments and savings in assets attracting capital gains, changes in capital gains tax is not likely to impact low-income households.
How did the confusion over the change in capital gains tax arise?
Confusion ensued after a foreign news wire agency broke the news, titled “India Weighs Higher Capital Gains Tax to Curb Inequality.” The story, quoting people in the know, said India is preparing an overhaul of its direct tax laws to replace a byzantine matrix of rules and help Prime Minister Narendra Modi reduce income inequality if he returns to power next year. “At the heart of the rework is potential increases in capital gains taxes for top income earners,” the story said. Further, it mentioned that while India levies a tax of nearly 30 per cent on income, it taxes gains on certain asset classes such as equity funds and stocks at a lower rate.
This story created panic in the stock market, resulting in a sharp fall in stock prices.
How did the Ministry respond?
The Finance Ministry responded through a tweet which said: “It is clarified that there is no such proposal before the Government on capital gains tax.”
Are there any grounds for rationalising the capital gains tax on various assets?
The capital gains tax mechanism in India is considered complex mainly on two grounds — the different holding periods for different categories of assets; and the need to remember the exact dates, as prescribed under law, for calculation of tax. Also, filing returns for capitals gains is too lengthy. All these need to change.