Glad tidings

Revise, Consolidate and Simplify — that’s what the government aims to do with direct tax laws. The direct tax code (DTC) bill, which was tabled by finance minister Pranab Mukherjee on August 30, has attempted to maintain status quo for investors in respect of taxability of capital gains, with a minor variation of switching from an exemption-based regime to a deduction-based regime.

Responding to several representations made by the investor fraternity after the first draft of DTC issued in 2009, the finance ministry has tried to somewhat alleviate the investors’ agony by providing for 100 per cent deduction on long-term capital gains on equity shares and units of equity-oriented funds chargeable to securities transaction tax (STT). Short-term capital gains on such assets are eligible for 50 per cent deduction on such income. For other assets, there are no such deductions.

However, indexation benefits shall continue to be available in case those assets are long term in nature. That brings the proposals largely in line with the current tax regime, though with certain distinctions.

Capital gains are proposed to be taxed at the rates applicable to the assessee. This effectively means that capital gains tax will range from 0 per cent to 15 per cent for listed securities and units of equity-oriented funds and 0 per cent to 30 per cent for other assets.

Investment asset

The concept of investment assets has been introduced in the proposals. Any gain arising from the transfer of investment asset will be taxable as capital gains.

Investment asset includes any capital asset which is not a business capital asset, any security held by FIIs and any undertaking or division of a business.

To ascertain the period of holding, it appears that the investment assets held for more than a year from the end of the financial year in which such an asset is acquired will be given the treatment of long-term capital asset; and the investment assets held for one year or less from the end of the financial year in which such an asset is acquired will be treated as a short-term capital asset.

Under the current tax regime, long-term capital gains on listed securities are taxable at 10 per cent, provided that indexation benefit is not availed. However, under DTC, no such beneficial tax rate is provided in respect of the listed securities.

FII norms

In respect of FIIs, the most litigious issue is the characterisation of income. Under DTC proposals, the income of FIIs should necessarily be taxable as income from capital gains. However, with DTC retaining the provisions that between the domestic law and relevant treaty, the one which is more beneficial to the taxpayer shall apply (except in certain specified cases), the issue of characterisation may still come up before the courts for adjudication.

Suresh Swamy is executive director and Swati Rajan Dua, manager — tax and regulatory services — Pricewaterhouse-Coopers