Budget 2023: Capital Market Taxes Need To Be Rationalised And Aligned

Tax regulations play a vital role in the choice of investment instrument, more so in the case of retail investors. A simple and straightforward capital gains taxation regime helps investors understand and appreciate the net of tax returns from investments.

The current capital gains taxation regime is complex and needs simplification. Multiple tax rates, availability of indexation for specific capital gains, lack of uniformity in determining period of holding to qualify as long-term capital asset, make it challenging for taxpayers to determine the tax impact on capital gains.

A predictable tax structure will enhance the confidence of retail investors and boost investments in capital markets. Hence there is a strong expectation from Budget 2023 on the rationalisation of the capital gains taxation regime.

Capital gains are taxed as long term or short term based on the period for which the asset is held, and the tax rates on capital gains vary. Further, indexation of the cost of acquisition is available in certain specific cases alone. The table below provides an overview of the same.

Clearly, there is a need to simplify the provisions and minimise the complexity.  Here are some expectations from Budget 2023:

Currently, the holding period for computation of long-term capital gains on listed shares is 12 months, while the holding period of for units of listed REITs and InvITs to classify as long-term capital asset, continues to be at 36 months. To bring parity in tax treatment, for computation of capital gains tax, the holding period for units of REITs and InvITs may be standardised at 12 months, instead of 36 months.

In the Finance Act of 2018, changes were made under capital gain taxation regime to tax long-term capital gains exceeding Rs 1 Lakh per annum from the sale of listed equity shares and units of equity-oriented mutual funds.  Such capital gains were fully exempt since 2004, upon introduction of the securities transaction tax with the intent to exempt long term capital gain and to collect taxes by way of Securities Transaction Tax or STT.  

The long-term capital gain taxation regime introduced in Finance Act 2018 was aimed to diversify and broad-base investments in financial assets. It was also to curb the erosion in the tax base and prevent the use of tax arbitrage opportunities created on account of exemption of LTCG. Given the increasing collections from STT, withdrawal of STT appears unlikely.

However, the government could consider increasing the threshold limit of Rs 1 lakh per year. This will encourage increased capital market participation by taxpayers. Further, the current regime does not entitle taxpayers to the rebate (of up to Rs 12,500), which should be permitted.

Given recent comments from the union revenue secretary, that there is the need to simplify the complex capital gains tax regime in India,  expectations from the Union Budget 2023 on rationalisation of the capital gains tax regime is high and announcements in this regard would bring cheer to investors.

Saraswathi Kasturirangan is Partner, Deloitte India; and Vijay Bharech is Director with Deloitte Haskins & Sells LLP; with contribution from Priyanka Bhutada, Manager with Deloitte Haskins & Sells LLP.

The views expressed here are those of the authors, and do not necessarily represent the views of BQ Prime or its editorial team