On February 1, Finance Minister Arun Jaitley in his budget speech proposed to put a 10% tax on long term capital gains that accrue to an investor from investments in those assets which pay securities transaction tax (STT). In October 2004, LTCG taxwas abolished to promote long term investments in shares and equity mutual funds.
WHAT IS LTCG?
According to the government, LTCG mean gains arising from the transfer of longterm capital asset. The new tax rule will apply to equity shares in a company listed on a recognised stock exchange, units of an equity oriented fund and unit of a business trust.
The new tax rules will also apply to those assets if the assets are held for a minimum period of twelve months from the date of acquisition, STT is paid at the time of transfer or even at the time of acquisition.
LTCG AND STT
After LTCG tax was done away with in 2004, to compensate the loss of revenue to the exchequer, STT was introduced. Under the current LTCG tax structure, STT and LTCG Tax will co-exist.
INDEXATION ON LTCG
In the previous format, LTCG was allowed to be taxed at 20% after indexation. Indexation is a process of calculation that eliminates the impact of inflation on a gain, price etc. using government published data.
In the new LTCG tax format, the government on Sunday clarified “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.”
THE LOGIC BEHIND LTCG TAX NOW
The government says that after the abolition of LTCG tax in 2004, the new taxation regime turned “biased against manufacturing and has encouraged diversion of investment to financial assets.” In addition, zero LTCG tax regime 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.”
So the new 10% tax on LTCG is being introduced “to minimise economic distortions and curb erosion of tax base,” the government said.
