Equity Share Transfers made before 31st March won’t be Taxed: Govt releases FAQs on Taxation of Long Term Capital Gains proposed in Finance Bill, 2018 [Read FAQs]

Long Term Capital Gain

The Central Government, today released a set of Frequently Asked Questions (FAQs) on the taxation of long term capital gains proposed in Finance Bill, 2018 introduced before the Parliament on Thursday.

In a bid to withdraw the exemption under clause (38) of section 10 and to introduce a new section 112A in the Income-tax Act, the Government has proposed to impose ten per cent tax on long-term capital gains arising from transfer of such long-term capital asset exceeding one lakh rupees.

Under the existing regime, long term capital gains arising from transfer of long term capital assets, being equity shares of a company or a unit of equity oriented fund or a unit of business trust, is exempt from income-tax under clause (38) of section 10 of the Act. However, transactions in such long-term capital assets are liable to securities transaction tax (STT).

“Consequently, this regime is inherently biased against manufacturing and has encouraged diversion of investment to financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these exemptions,” the Central Board of Direct Taxes said.

As per the FAQ, the Central Government had exempted certain modes of acquisition of equity shares for the purposes of clause (38) of section 10 of the Act vide notification no. 43/2017 dated 5th of June, 2017. This notification is proposed to be reiterated for the purposes of clause 31 of the Finance Bill, 2018 after its enactment.

Sub-clause (5) of clause 31 of the Finance Bill, 2018, inter alia, provides that the long-term capital gain will be computed without giving effect to the provisions of the second provisos of section 48. Accordingly, it is clarified that the benefit of inflation indexation of the cost of acquisition would not be available for computing long-term capital gains under the new tax regime.

It said that the proposed new tax regime will apply to transfer made on or after 1st April, 2018. The existing regime providing exemption under clause (38) of section 10 of the Act will continue to be available for transfer made on or before 31st March, 2018.

“As the fair market value on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations explained in Ans 7.), the gains accrued upto 31st January, 2018 will continue to be exempt,” the Board clarified.

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