Budget 2023-24 | Experts demand new roadmap for capital gains taxation — What we know so far?

The government has received several proposals from the industry to simplify the capital gains tax structure, and changes are expected in the Budget 2023-24. It must be noted that this has been long due and experts have been seeking parity among tax rates and holding periods for investments across equity, debt and immovable property in every Budget announcement.

Currently, asset classes are not taxed uniformly and have different holding periods for levying capital gains tax, which needs to be aligned, experts believe.

In an interview with CNBC-TV18, Dinesh Kanabar, CEO of Dhruva Advisors; Sudhir Kapadia, Partner, Tax & Regulatory Services at EY India; Nilesh Shah, MD of Kotak Mahindra AMC and DP Singh, Deputy MD and Chief Business Officer at SBI Mutual Fund spoke at length on simplification of capital gains tax and what should the way forward be.

According to Shah, the loopholes need to be plugged over and above the issues related to tenure between debt equity real estate, those related to tax rates and issues those related to structuring that all needs to sort out.

As of now, investment gains are taxed based on a lock-in or holding period.

Investments in equity or equity-linked mutual funds for more than one year are considered as long-term, and attract a 10 percent tax on gains of more than Rs 1 lakh. Investments in equity held up to one year are considered short-term and attract a 15 percent tax.

Kanabar of Dhruva Advisors believes that the government needs to relook at the maximum marginal rate.

“I do not think 42 percent is a rate which one should look at. Bring it down to 35 – that is 30 plus surcharge and then put a super-rich surcharge. And a surcharge cannot become a permanent fixture. It has to be for a specific purpose for a specific period of time,” he told CNBC-TV18.

According to Kapadia, it’s good to have attractive rates for long-term capital gains and short-term capital gains should be taxed at normal rates.

“We want to encourage more formalization in the economy. It is good to have these slightly attractive rates for long-term capital gains, but short term capital gains has to be taxed as normal income – it is all over the world and therefore, the normal rates apply. So I do not think this is a complexity feature as far as capital gains tax is concerned,” he said.

At present, the capital gains tax regime prescribes the holding period for determining whether the gains made at the time of selling the asset is short-term or long-term. The holding period and tax rate differ depending on the asset class.

For certain assets, long-term capital gains are taxed without the benefit of indexation or accounting for inflation. Experts feels that the same should be revised.

The index year for capital gains tax calculation is revised periodically to make it more relevant. The last revision took place in 2017 when the base year was updated to 2001. Since the prices of assets increase over time, the indexation is used to arrive at the inflation-adjusted purchasing price of assets to compute long-term capital gains for the purpose of taxation.

Recently, Revenue Secretary Tarun Bajaj also said that the current capital gains tax regime is complicated due to the various rates and holding periods, and its simplification and clean-up are long overdue.

Bajaj was speaking about different capital gains taxes levied on assets like equity, debt and immovable property.

"Our capital gains tax regime is very complicated. It needs simplification. I have said this and I am repeating it again. We charge different taxes on different financials. We also have different time periods to decide, short-term and long-term. In some cases, we have indexation and in other cases, we don't have it. All this needs cleaning up," he told CNBC-TV18 in an interview.

For more details, watch the accompanying video