What is Long Term Capital Gain and why it important for investors?

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The Government with an intention to simplify tax regime on securities transaction has exempted long-term capital gain on transfer of shares through the recognized stock exchange from the levy of tax in Budget 2004.

Now there is an apprehension that Government may remove the exemption of Long-term capital gains tax on the sale of listed company shares. This would prove counterproductive. Here’s why.

Securities Transaction Tax, popularly known as STT, is levied at the rate of 0.1% on the delivery based purchase and sale transactions. STT is levied both on domestic as well as foreign investors.STT is collected by the stock exchange from the purchaser and seller and then deposited with the government. Collection of STT is very easy and gets charged on all transactions whether there is a profit or loss or whether the income of the person below the basic exemption limit or not.

Charging of long-term capital gains may have to be accompanied by removal of STT to avoid double taxation. It is not certain whether it will result in revenue gain but would certainly impact sentiments in the capital market.

It would thus affect the common man who has invested in the stock market in last few years. If Government fees that exemption of long-term capital gains is being misused for tax evasion, the Government could think of increasing the holding period from one year to two years.

If Government wants to withdraw the exemption, it should be done only in respect of shares acquired in future.

If capital gains tax is to be levied on the basic historical cost, it will lead to tremendous selling pressure on the stock market. This will make capital raising a very difficult and expensive in future.

However, considering the long-term vision of this government is to simplify and bring stable tax regime it would be better not to tamper with long-term capital gains exemption on listed securities.

Rationalization of tax on book profit with normal tax:

In the last budget, the corporate tax rate was reduced to 25% for companies having a turnover less than 50 crores for the year ending March 2016.

It is expected that this year budget may see a significant reduction in corporate tax rate of 30% to 25% across all companies irrespective of their sizes.

Presently companies are paying tax on their book profit @ 18.50% (i.e. minimum alternate tax) if the tax payable under the normal provision is lower than 18.50%.

The tax paid on book profit in excess of normal profit is allowed to be carry forward for 15 years to set off in future when the tax payable under the normal provision is higher than the tax on book profit.

MAT was introduced only with the intention that companies having large profits and declaring a dividend, but not paying any taxes should pay some taxes.

The government should reduce the tax rate for MAT from present 18.50% to atleast 12.5%. Many companies are having huge unabsorbed MAT credit, and if the rate of MAT is not reduced, they will find it very difficult to absorb MAT credit and such credit would lapse. The very purpose of granting incentive would get lost.

Disclaimer: The author is Partner, N. A. Shah Associates LLP. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.moneycontrol