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NEW DELHI : The Narendra Modi administration is likely to revamp the capital gains tax structure in the next budget to augment revenue collections and boost spending on welfare schemes, two officials aware of the deliberations said.

At the heart of the proposal being studied in the finance ministry is the government’s philosophy that passive income earned from the capital market should not be taxed at a lower rate than income earned from doing business, which involves taking entrepreneurial risks and job creation.

The plan is also rooted in the government’s idea of welfarism for which revenue needs to be boosted.

“Making the capital gains tax structure more efficient needs legislative amendments. This may be taken up in the next budget as it cannot be done out of the blue," said one of the officials cited above.

In India, long-term capital gains on listed equities held for more than a year is taxed at 10% on the portion of such gain above a threshold of 1 lakh. This provision was introduced with effect from 1 April 2019.

The capital gains tax regime prescribes the holding period for determining whether the gain made when selling the asset is short term or long term.

Short-term capital gain on listed equities held for less than a year is taxed at 15% in the case of listed shares and the applicable tax slab if it is unlisted.

A second official, who also spoke on condition of anonymity, said taxation and benefit transfers were two levellers as far as tackling income inequality is concerned. “In India, we do not have the data, but experience from countries such as the US, where data is available, suggests the picture of post-tax, post-transfer income inequality is quite different from the one painted by data on pre-tax, pre-transfer income inequality," the official said.

During post-budget industry interactions, revenue secretary Tarun Bajaj said on 9 February that the capital gains tax structure has become too complicated and needs a relook. Later, on 28 February, he said 80% of the long-term capital gains from equities in FY20 was made by people earning 50 lakh and more.

“We have looked at the capital gains tax structure in other countries, and we cannot be an outlier," said the first official cited above.

The government estimates that long-term capital gains are taxed in many countries at the 25-30% range, or the applicable income tax rates.

An email sent to the finance ministry spokesperson on Sunday seeking comments for the story remained unanswered at the time of publishing.

Higher capital gains tax in India when compared with other emerging market economies could reduce the country’s relative attractiveness as an investment destination and encourage Indians to invest in assets such as real estate. Lower investments in productive assets can also slow down economic growth.

Tax experts said that raising long-term capital gain tax on equities also faces other practical problems.

“The buoyancy in the capital markets that we have seen in recent times is because of the tax regime. One needs to see if any such change also derails the government’s plan to pursue large disinvestments," said a tax expert who did not want to be named.

Sudhir Kapadia, national tax leader, EY, said taxes on capital gains and dividends is a second layer of taxation in the hands of shareholders as the corporate entity has already paid taxes on its profits.

“It may not be accurate to refer to all capital gain as passive income as entrepreneurs building a company from scratch would be shareholders, though the shares would be unlisted, to begin with. Given the entrepreneurial momentum in the country, it is not accurate to refer to all gains from equity holding as passive income. We need to keep in mind the global competitive environment before any drastic change in taxation is made as both people and capital are highly mobile," Kapadia said.

ABOUT THE AUTHOR
Gireesh Chandra Prasad
Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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