Slightly tweaking its initial Budget proposal to tax long-term capital gains (LTCG), the government extended indexation benefit for computing tax liability on sale of shares listed after January 31. The tax on capital gains arising from such transactions, however, will continue to be at the rate of 20 per cent.
The indexation benefit, which takes into account the impact of inflation on acquisition cost, will not be available on gains made from the sale of listed securities, as per the amendments to the Finance Bill, which was passed by Lok Sabha on Wednesday.
The 2018-19 Budget had after a gap of 14 years reintroduced 10 per cent tax on long-term capital gains(LTCG) exceeding Rs 1 lakh from sale of shares. Currently, 15 per cent tax is levied on capital gains made on sale of shares within a year of purchase, while for shares sold after a year of purchase, it is nil. LTCG on sale of unlisted shares is taxed at 20 per cent, while in case of short term capital gains it is 30 per cent.
The finance ministry had received various representations demanding removal of LTCG tax. After the imposition of the LTCG tax, there were concerns that it would adversely affect the market for initial public offerings as it would have been levied on acquisition cost, while at the time of listing, the shares are listed at a premium. Now, with the indexation benefit provided to unlisted shares, the cost of acquisition of such shares will rise in line with the cost inflation index spanning the holding period of the shares.
Nangia & Co managing partner Rakesh Nangia said the amendment addresses the concerns of the community in respect of capital gains arising on transfer of unlisted shares that get listed after February 1, 2018, but not completely. “The indexation benefit would surely help increase acquisition cost of unlisted shares in line with inflation over the holding period for the purpose of tax calculation, thus reducing the capital gains amount and the tax levied on the gains. However, this change from the proposed budget has partly addressed the concern, since the Cost Inflation Index may not completely account for the rise in the fair market value of such shares,” Nangia said.
Besides, the government introduced an amendment to ensure that the Public Provident Fund (PPF) accounts are not attached in case of loan default. The amendment has been made in the Government savings Banks Act, 1873, through the Finance Bill, 2018. The government also amended the definition for economic presence widening the scope for taxation of digital services of foreign companies in India.
The Finance Bill had proposed that the transactions or activities shall constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India. Adding another condition, the Finance Bill now provides that the transactions or activities shall constitute significant economic presence in India, whether or not the agreement for such transactions or activities is entered in India. “Meaning thereby, that the plea that foreign companies used to take that the agreement to sell the goods or services was concluded outside India and hence the economic activity has taken place outside India, shall not stand the water anymore,” Nangia said.