The government will review the definition of long-term capital gains on equity investment for domestic investors early next fiscal at the time of implementing General Anti-Avoidance Rules (GAAR) in April 2017, Revenue Secretary Hasmukh Adhia said on Wednesday.
While gains on sale of shares held for less than 12 months are treated as short-term capital gains and attract a 15 per cent short-term capital gains tax, the gains on sale of shares after holding for 12 months are treated as long-term capital gains (LTCG) and, currently, attract zero tax.
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“We did debate (changing the definition of LTCG in case of shares) but again ultimately we thought the best timing to do it would be once GAAR comes into being, not now,” Adhia told The Indian Express in an interview. If the LTCG definition is reviewed before implementation of GAAR, then the domestic investor may be at a disadvantage, he said.
“Then (in 2017) we can review it. Why, because otherwise there will be disadvantage to domestic investor. People who are investing through FII route through Mauritius, they are not even paying first 15 per cent for the first year. They have got a clear advantage then. Once that rule is plugged, then we can have a different regime wherein everybody pays. That is the idea,” he said.
In his Budget speech on Monday, Finance Minister Arun Jaitley said GAAR will be implemented from April 1, 2017. GAAR rules are intended to check tax avoidance for investments by entities based mainly in overseas tax havens.
Ahead of the Budget announcement, there were apprehensions in the market that the government may increase the holding period for LTCG from one year to three years. In case of unlisted companies, the Budget 2016-17 has reduced the period for getting benefit of long-term capital gain regime to two years from three years.
First announced by former finance minister Pranab Mukherjee in the 2012-13 Budget, implementation of GAAR has been deferred thrice, first to April 2014, then to April 2015, and now to April 2017. In the Budget 2016-17, Jaitley also deferred rules determining residency of a foreign company — known as the Place of Effective Management (POEM) rules — by one year.