The Indian Capital Gains Tax structure is overly complicated with respect to the various classes of assets, tax rates, period of holdings and indexation benefits.
Over the years, there have been timely amendments in the capital gains framework and has thus evolved and risen to a complex tax code within its framework. As an effect, due to various policy considerations, the Indian Capital Gains Taxation structure has turned out to be a complex maze.
On account of the introduction of various rules at various time intervals, the complex structure is aligned randomly without any thoughtful rationalizing as a whole. For example,
- The holding period for considering listed shares as long-term is 12 months whereas for unlisted shares is 24 months.
- Certain class of assets is eligible for indexation (applicable only for long-term capital gains) whereas others are not e.g., the benefit of indexation is not available on long-term capital gains arising from the transfer of listed equity shares, listed/unlisted bonds, and debentures etc.
- The tax rates differ for residents and non-residents i.e., the tax rate for capital gains arising from the sale of unlisted shares/bonds/debentures for residents is 20 per cent whereas for non-residents it is 10 per cent. Similarly, the rate of long-term capital gains tax rate varies between different classes of assets e.g., 10 per cent for listed shares, listed bonds equity oriented mutual funds and 20 per cent for unlisted shares, unlisted bonds, real estate etc.
- Tax rates are different in case of those where STT is applicable.
This kind of differentiation has resulted in lot of complexities in planning investments and working of the tax on different classes of assets & also within the same class of assets. It has also created a concessional tax regime in favour of one class over the other.
Rules, conditions and tax rates may be simplified whereby the holding period for all financial assets including both listed and unlisted equity/preference shares, equity-oriented mutual funds, etc., instruments like RIET/InvtIT units, debt-oriented mutual fund units, bonds, debentures, etc. can be aligned to a uniform of 12 months. Similar rates of capital gains tax should become applicable for both resident and non-resident taxpayers. The simplification can also be brought about where shares / mutual funds are subject to STT or otherwise.
There is a need for overall restructuring which would bring uniformity in tax rates, in period of holding, in taxing resident & non-resident, closing the gap between listed and unlisted equity etc.
It is true that the capital markets in India are growing at an exponential pace and government is keen to provide support. So, for that it is advised to remove complexities in the rates, holding periods, indexation benefits, and to streamline the structure. This will help to align the government’s agenda of taxpayer-friendly initiatives and in removing the complexities attached with the taxation of Capital Gains.
