Union Budget 2023-24: Industry Pins Hope On Rationalisation Of Capital Gains Tax

Ahead of the Union Budget 2023-24, India Inc. has started tying its hopes on various economic reforms, some that arguably may have been age-old demands. Just a few days after Finance Minister Nirmala Sitharaman ended the pre-budget consultations with industry experts, many have come forward and shared their budget expectations in public domain. One such area is tax, especially the 'capital gains tax.'

As common as it may sound to stakeholders, in the last few years, the capital gains tax regime has garnered a lot of attention, sometimes even for the wrong reasons. This time as well, as the Budget 2023 preparations begin, industry leaders and experts have tied their hopes on the rationalisation of capital gains tax regime. While some believe that changes are expected, others don’t as rationalisation of capital gains tax has been a yearly demand.

Lakshmi Iyer, CEO Investment Advisory, Kotak Investment Advisors Limited, told Outlook Business, “Industry always has a wish list and even this time, it is no different. There is a hope to see taxation parity for debt mutual funds (MFs) and listed debentures. There is also a wish to see capital gains tenure to be similar to debt and equity as currently it is three years for fixed income and one year for equities.”

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However, Aditya Shah, Founder of JST Investments, told Outlook Business that he doesn't expect any rebate on tax rates. “It is expected that the government will try to simplify the structure of capital gains tax regime. But I don't expect them to give any rebate on tax rates as this is a pre-election year budget. So, the government will try to avoid controversies and largely focus on boosting the economy as well as generating employment. I expect tax cuts to be minimal,” said Shah.

Recently, even Revenue Secretary Tarun Bajaj said that the capital gains tax regime is complicated and a cleanup has been long overdue. Let’s understand what the industry expectations from the Union Budget 2023 are with regards to the capital gains tax.

Budget 2023 Capital Gains Tax: Industry Expectations Explained

As per the Income Tax Act, “Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place.”

Touted as a complicated regime, under the capital gains tax, the rates vary depending on the type of asset and period of holding. Here, it is the latter that decides whether the gains will be taxed as long-term capital gains (LTCG) or short-term capital gains (STCG). But these capital gains tax rates differ even within the same asset class.

It is mainly this point that has brought the regime under scanner. At large, many stakeholders hope that through the Budget 2023, the government brings some parity between similar asset classes and revises the base year for computing indexation benefit to make it more relevant as per the current time. As per the rules, the index year for calculating the capital gains tax is revised periodically to make it more relevant. However, the last revision took place in 2017 when the base year was updated to 2001.

Elaborating on this, Anant Singhania, President of IMC Chamber of Commerce and Industry, told Outlook Business, “Currently, there are three different holding periods applicable for calculation of capital gains  i.e., 12 months, 24 months and 36 months for different category of assets and tax rates vary from 10 per cent, 15 per cent, 20 per cent to 30 per cent, depending on various factors like with/without indexation, listed/unlisted, resident/non-resident etc. There should be just two rates applicable, one for short term (less than a year) at 20 per cent and the other long term (beyond a year) at 10 per cent. This would avoid any confusion, litigation and will be in sync with the ease of doing business.”

Calling the current capital gains tax structure ‘complicated,’ Gopal Bohra, Partner, N.A. Shah Associates advocated for tweaks in the capital gains levied on equity, debt and immovable property. He said, “In order to boost investments in start-up or new age businesses, government should consider providing clarity on year of taxation on the transfer of shares where consideration is linked with future earnings from the business. Currently, there is no clarity for the year in which such contingent consideration is taxable and even the judicial decisions are divided."