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    Budget 2019: These are some of the clarifications awaited on LTCG tax

    Budget 2019: These are some of the clarifications awaited on LTCG tax

    Budget 2019: These are some of the clarifications awaited on LTCG tax
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    By Harsha Rawal   IST (Updated)

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    Though the intention was to tax LTCG, there are various nuances in the provisions that need to be reconsidered even though clarified by the tax department

    Budget 2018 was the last full-fledged budget presented by the government led by Narendra Modi. The 2018 budget introduced various provisions and reforms as far as income tax was concerned, to provide a push to the growing Indian economy. The provisions ranged from reducing income tax rates for domestic companies satisfying prescribed conditions, to introducing the Health and Education Cess at the rate of 4 percent (effectively increasing the rate of cess by 1 percent) to providing enhanced benefits to the start-up industry. One of the most discussed provision that caught the attention of majority of taxpayers was the re-introduction of the Long Term Capital Gains (LTCG) tax on profit earned from sale of equity shares listed on a recognized stock exchange in India.
    The LTCG tax was re-introduced after a time gap of 14 years. The provisions were closely followed since they impacted majority of taxpayers of the country. The tax was levied at the rate of 10 percent (plus applicable surcharge and cess) while providing relief from gains accrued up to January 31, 2018, i.e., a mechanism was derived wherein the stock price as on 31 January 2018 was considered as the deemed cost, provided it is beneficial to the taxpayer. Thus, the provisions were prospective in nature and not retrospective. Though the intention was to tax LTCG, there are various nuances in the provisions that need to be reconsidered even though clarified by the tax department. They also need to be clarified in view of the ambiguity involved. Following are some of the illustrative points:
    • Treatment of compulsorily convertible instruments – The current provisions do not provide clarity on the cost to be adopted for the purpose of computation of capital gains in case of instruments that are compulsorily converted into equity shares after 1 April 2018. For e.g. Mr. XYZ holds 10 compulsorily convertible debentures of company A worth INR 100 to be converted into 10 equity shares (assuming that the conversion ratio is 1:1) on 26 September 2018. In case Mr. XYZ sells all 10 shares for INR 150, then the profit on the same will be taxable at 10 percent (plus applicable surcharge and education cess). However, the current provisions do not clarify the cost to be adopted for the same i.e. whether cost inflation index is to be considered, or whether benefit of fair valuation as on 31 January 2018 is to be considered? Since the shares were listed before 1 February 2018, a suitable mechanism should be notified for such transactions taking the share price as on 31 January, as the base.
    • Shares acquired by way of merger of two companies – As per the prevalent provisions, the benefit of grandfathering is applicable only to shares held on or before 31st January 2018. In case of merger of two companies, there is no clarity as to whether the shareholders of the transferor companies will get the benefit of grandfathering or not. Ideally, such shareholders should also get the benefit and a suitable clarity should be issued by the tax department. This can be explained by way of an illustration. For e.g. Mr. XYZ acquired 100 shares of company A on 10 November 2003. Company A is proposed to get merged into company B w.e.f 26 September 2018. Accordingly, XYZ will receive 100 shares (assuming exchange ratio is 1:1) of company B. Clarity is required on whether while computing the profit on sale of shares of B, can the concept of deemed cost be applied or not?
    • Cost Inflation Index – Currently, it has been specifically stated in the provisions of law that the benefit of cost inflation index shall not be provided to the taxpayer and the profit shall be taxed at the rate of 10 percent (plus applicable surcharge and cess). Currently, for LTCG the tax rates prescribed are 10 percent (without cost inflation index benefit) or 20 percent (with cost inflation index benefit), whichever is beneficial to the taxpayer. However, there may be cases where the shares are held for a substantially long period of time and the tax rate of 20 percent if provided may be beneficial to the taxpayer. Accordingly, the tax department should reconsider providing the benefit of cost inflation index to the taxpayer. Although the difference between the tax applicable at 10 percent and 20 percent may be material only after sufficient time has elapsed, an option should be available to the taxpayer.
    • Apart from the above expectations on clarifications of the income tax provisions, it is expected that the interim Budget  to be presented on 1 February, can introduce various reforms that may act as a booster to fasten the growth of the Indian economy.
       
      Harsha Rawal is Director with Deloitte Haskins & Sells LLP; and Parth Shah is Deputy Manager with Deloitte Haskins and Sells LLP
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