Vide Finance Bill, 2018 the Finance Minister has proposed certain amendments in regard to scheme of taxation of long term capital gains arising on transfer of equity shares and units of mutual funds. Proposed amendments and their implications are being discussed hereunder with reference to present provisions of the Act.
As per section 10(38) of the Income-tax Act any income arising from transfer of long term capital asset being an equity share in a company or a unit of Equity Oriented Fund or a unit of Business Trust is exempt from tax provided Security Transaction Tax (STT) has been paid on transfer of the shares or units.
By way of insertion of a proviso vide Finance Act, 2017 w.e.f. 1-4-2018 i.e. A.Y. 2018-19 it was provided that exemption in respect of income arising on transfer of equity shares in a company will not be available in case STT was not paid in respect of transaction for acquisition of shares except in the cases of acquisition as may be notified by the Central Government. The Central Government
vide Notification No. SO 1789(E) dated 5-6-2017 has notified certain cases of acquisition of shares pursuant to aforesaid proviso wherein exemption will be available for income on transfer of shares even if STT at the time of acquisition has not been paid. Such transfers are generally those transactions which represent allotment of shares on preferential basis or shares allotted as per the scheme approved by the Government etc.
Further, proviso to Section 10(38) of the Income-tax Act provides that such capital gain, notwithstanding it will be exempt, will be considered for the purpose of book profit for the purpose of payment of tax under Section 115 JB of the Act. It has also been provided that income arising on transactions undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration is paid or payable in foreign currency will also be exempt notwithstanding that STT in respect thereof has not been paid.
In conclusion, it is stated that in terms of Section 10(38) of the Income-tax Act capital gains arising on transfer of shares or units of mutual funds held for a period of 12 months will be exempt from tax.
In respect of transfer of shares or units held for long term, other than referred to in Section 10(38) of the Act, tax is payable in terms of provisions of Section 112 of the Income-tax Act. In respect of such transfers, tax is payable @ 20% after taking indexation as per the second proviso to Section 48 of the Income-tax Act. The aforesaid Section also provides an option to an assessee that tax can be paid by him on capital gains @ 10% without taking indexation.
Provisions of Section 10(38) are proposed to be made inapplicable in respect of transfer of shares or units after 1-4-2018. Accordingly, no exemption from capital gains arising on transfer of shares or units even held for long term will be available in accordance with present provisions of Section 10(38) of the Income-tax Act.
A new Section 112A is proposed to be inserted in the Act. The aforesaid section provides that notwithstanding provisions of Section 112, tax will be payable by an assessee in respect of capital gains arising from transfer of long term asset being equity shares in a company or units of an equity oriented fund or units of business trust on the amount exceeding ₹ one lakh @ 10%. Further, it has been provided that in respect of equity shares STT has been paid on acquisition as well as on transfer of shares. It has, however, been provided in sub-section (4) that Central Government may by notification specify nature of acquisition in respect of which condition of payment of STT will not be applicable. In regard to capital gains arising on transfer of units of oriented fund or units of business trust condition of payment of STT is applicable only at the time of transfer of such units.
Tax liability payable by an assessee in terms of sub-section (2) is to be determined on the basis that tax will be payable @ 10% of amount of capital gain exceeding ₹ one lakh and tax will be payable on remaining income considering the same to be the total income. By way of proviso it has further been provided that in case of an individual or Hindu Undivided Family total income other than the capital gains is less than the maximum amount not chargeable to tax, amount of capital gains to the extent of such amount will be reduced and accordingly tax on long term capital gain @ 10% is to be calculated on the remaining amount of long term capital gains.
Sub-section (3) exempts the transactions from taxability of transfer undertaken on a recognised stock exchange located in any International Financial Services Centre as at present.
Sub-section (5) provides that benefit of indexation will not be available to the assessees.
Sub-section (6) provides that for the purpose of determination of long term capital gains which will be chargeable as per Section 112A of the Income-tax Act fair market as on 1-2-2018 will be cost of acquisition in case same is higher. Provisions of Sub-Sections (7) & (8) provide that no deduction in any of the Sections under Chapter VIA will be available and no tax rebate available under Section 87A will also be allowable to the assesses from amount of long term capital gain and tax payable thereon.
In regard to proposed provisions of Section 112A of the Income Tax Act following comments are being made:-
1. The proposed amendments are against the concept introduced in the Income Tax Act for granting exemption from long term capital gain along with levy of STT w.e.f 1-4-2004. The Finance Minister in his speech at that time had stated that it will be win-win situation. The assessee will be able to get exemption in respect of long term capital gain arising on transactions on which STT has been paid and the Government will also be able to get its due tax by way of STT. The amendment in the Scheme is contrary to the purpose and intention with which exemption was introduced in Section 10(38) of the Income Tax Act.
2. It may be stated that provisions of Section 112A, like other sections in Chapter XII provides for ‘Determination of Tax in Certain Special Cases’. These sections are not the charging sections but same provides for special rates in respect of particular nature of the income. Charging sections of the Income Tax Act in relation to capital gain are Sections 45 to 55. Section 48, which provides for indexation is part of the charging sections. Accordingly, an issue arises whether an assessee is required to compute the income under the head “Capital Gain” as per above referred charging sections or total income under the head “Capital Gain” needs to be calculated taking into consideration provisions of Section 112A of the Income Tax Act. In case we refer to provisions of Section 112 of the Act same provides for payment of tax @ 20% on long term capital gain, which is determined as per the charging sections including the provision for indexation. Thereafter a Proviso has been provided therein to the effect that in case tax payable @ 20% exceeds the tax payable @ 10% of the amount of capital gain without taking indexation then such excess amount of tax is to be ignored. Accordingly, the aforesaid Proviso in Section 112 do not modify the computation of taxable income but only grant a relief in the computation of tax payable. Section 112A, however, provides that long term capital gain shall be determined without taking indexation. Hence, an issue arises that how an assessee has to compute his income under the head “Capital Gain”. This may lead to litigation unless clarified by way of suitable amendment in the charging sections.
3. As per the present provisions of Section 112 of the Act an assessee has an option to pay tax @ 20% after availing benefits of indexation or @ 10% without availing benefits of indexation. In the proposed provisions of section 112A of the Act tax is payable in all cases @ 10% without taking benefit of indexation. It is incongruous with provisions of taxation of long term capital gain. An assessee may be in a disadvantageous position while making payment of tax @ 10% without availing benefit of indexation. An option should be available to an assessee to pay tax after indexation @ 20% or without indexation @ 10% as is available in section 112 of the Act.
4. It is stated that in the cases of individuals having total income other than capital gain of less than the maximum limit of income not chargeable to tax and an amount of capital gain along with other income is less than Rs. Five Lacs, tax liability in terms of provisions of Section 112A of the Income Tax Act will works out to be more than the tax liability which otherwise would be in such cases. This position is being shown by way of following example:-
Income other than long term capital gain 2,00,000/-
Long term capital gain on transfer of shares 3,00,000/-
Total Income 5,00,000/-
A. Tax payable considering long term capital gain as part of normal taxable income.
– Tax payable on Rs. 2,50,000/- Nil
– Tax payable on balance of Rs. 2,50,000/- @ 5% 12,500/-
Total Tax payable 12,500/-
Less rebate available u/s. 87A of the Act 5,000/-
Net amount of tax payable. 7,500/-
B. Tax payable by the assessee in terms of Section 112A of the Act
Long term capital gain 3,00,000/-
Less :Amount representing difference between other income and exempt Income not chargeable to tax. 50,000/-
Balance long term capital gain 2,50,000/-
Less : Exemption available u/s. 112A 1,00,000/-
Balance long term capital gain chargeable to tax 1,50,000/-
Tax payable on above @ 10% 15,000/-
Tax payable on other income Nil
Total Tax Payable. 15,000/-
It is suggested that an option should be provided to an assessee to calculate the tax considering the long term capital gain as part of its income and pay the tax thereon accordingly or avail the concession provides for of specified rate in Section 112A of the Act.
5. There was also a doubt in regard to the position whether loss can be set off against any other long term capital gain and wether same can be carried over to subsequent year for the purpose of set off against long term capital gain. This position has been clarified by CBDT vide Notification dated 4-2-2018 wherein it has been stated that long term capital loss can be set off and carried forward in accordance with existing provisions of the Act and, therefore, it can be set off against any other long term capital gains and unabsorbed loss can be carried forward to subsequent 8 years for set off against long term capital gains.
6. There appears to be anomaly while reading Sub-section (4) of Section 112A of the Income Tax Act with reference to provisions of Sub-section (1) of Section 112A of the Act. Sub-Section (1)(iii)(a) provides for a condition for payment of STT on acquisition as well as on transfer of equity shares. Sub-section (4) provides that Central Government may by notification specify the nature of acquisition in respect of which provisions of Sub-clause (a) of Clause (iii) of Sub-section (1) shall not apply. The reading of above Sub-section gives an interpretation that in respect of cases specified by the Central Government with reference to condition of STT on acquisition above clause will not be applicable at all and resulting thereby condition for payment of STT will not apply. This appears to be an unintended position.
It is suggested that provisions should provide for computation of long term capital gain in respect of equity shares and units referred to in section 112A of the Act in the normal course as per provisions of sections 45 – 55 of the Act including indexation in terms of proviso to section 48 of the Act. As regards cost of acquisition to be taken at fair market value as on 31-1-2018 necessary amendment should be made in section 49 of the Act. Provisions of section 112 should be applicable to these shares and units also and an option should be available to an assessee to pay the tax at 20% after taking indexation or @ 10% after determining the long term capital gain without indexation. In case of individual assesses an option should be provided to determine the tax liability considering the income in the normal course or availing benefit of concessional rate of tax as provided in this regard. These amendments are necessary since provisions as proposed will be disadvantageous to certain assesses and may also lead to litigation.