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LONG TERM CAPITAL GAINS TAX IN BUDGET 2018: AMBIGUITIES AND IMPLICATIONS

The budget for financial year (“FY”) 2018-19 (“Budget”) has proposed a 10% tax on transfer of listed equity shares, units of an equity oriented mutual fund and units of a business trust, where such gains exceed INR 100,000 (approx. USD 1500), with effect from April 1, 2018.

Previously, in 2004, Securities Transaction tax (“STT”) was introduced in India in place of Long Term Capital Gains Tax (“LTCG”). STT is a direct tax payable on the value of taxable securities transactions done through a stock exchange. The introduction of LTCG tax while retaining STT has made India the only country in the world to have both taxes at the same time.

While the new tax will be applicable to all investments, the reference price would be the highest quoted price on January 31, 2018, or the cost of acquisition, whichever is higher. This technical construct means that the realized/notional gains made until January 31, 2018 will be grandfathered. If the actual cost is less than the fair market value of such asset as on 31January, 2018, the fair market value will be deemed to be the cost of acquisition, thus, protecting gains incurred before 31January, 2018.

However, there is no clarity with respect to valuation and computation of gains in case of unlisted companies as well as ESOPs. Introduction of LTCG Tax while the former STT remains may drive away Foreign Portfolio Investment away from India to other offshore countries which have a more tax friendly regime for (foreign) investors. It will entail additional tax compliance and operational costs for investors.

Further, in the case of equity shares, STT is paid both at the time of acquisition and at the time of transfer. In the case of Public Issue, STT is not paid at the time of acquisition of Equity Shares. The method of computation of Long Term Capital Gains in such cases needs clarification. Another clarification is required in the case of off -market purchase and sales as well as gifts. STT is not required to be paid in such transactions. The method of computation and the exemption, if any, applicable to such transactions needs clarification. The biggest disadvantage of this development is to the middle class pensioners, whose source of income from investment of savings in mutual funds will be affected.