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Capital gains tax regime needs to be tweaked: Revenue secretary Tarun Bajaj

Revenue secy says rates and holding periods should be streamlined

Bs_logoTarun Bajaj
Revenue Secretary Tarun Bajaj
Arup Roychoudhury New Delhi
5 min read Last Updated : Feb 10 2022 | 12:30 AM IST
Revenue Secretary Tarun Bajaj said on Wednesday that the current capital gains tax regime needs a fresh look and that the various rates and holding periods need to be streamlined as well.

Speaking at an event by industry body Confederation of Indian Industry, Bajaj also said had the Centre not extended Rs 1 trillion in long-term capital expenditure (capex) loans to states, the fiscal deficit target for 2022-23 (FY23) would have been 6 per cent, against the budgeted 6.4 per cent of nominal gross domestic product (GDP).

“My view is that we need to absolutely relook at capital gains. Whenever I discuss this, it creates friction. I think it is too complicated in terms of rates and holding periods. This is a work in progress,” he said, addressing industry representatives.

“We have done some work on this to see what the rates and periods are elsewhere in the world, including in other developing nations and developed nations. I think a lot needs to be done. The problem is when we rationalise it, some investors will be losers, others gainers. That is the difficult part,” he said, adding that the industry bodies should also come up with suggestions on how best to streamline the capital gains regime.

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The rates and holding periods of capital gains tax differ for different asset classes. For example, equity and equity mutual funds (MFs) attract short-term capital gains (STCG) tax of 15 per cent, and long-term capital gains (LTCG) tax of 10 per cent for gains above Rs 1 lakh. The STCG on most bond investments is at the tax slab the investor comes under. However, LTCG is either 10 per cent or 20 per cent, depending upon whether it is a listed or unlisted bond or a debt MF. For real estate, the LTCG is at 20 per cent.

In the pre-Budget interactions with Finance Minister (FM) Nirmala Sitharaman and her officials, there was demand from markets and industry representatives to simplify the capital gains tax structure. In her 2022 Union Budget, Sitharaman only tweaked the surcharge on LTCG arising on transfer of any type of assets, capping it at 15 per cent, compared with the earlier 37 per cent.

Under the Income-Tax Act, gains from the sale of capital assets, both moveable and immoveable, are subject to capital gains tax. The Act, however, excludes moveable personal assets, such as cars, apparel, and furniture, from this tax.

Bajaj said in the current fiscal year (2021-22, or FY22), the government is likely to collect good revenue from capital gains tax. "We are making an estimate that it should be between Rs 60,000 and Rs 80,000 crore in FY22. Last year, it was around Rs 6,000-8,000 crore. Now with the tapering happening and rates likely to go up in the US and with money moving out, one does not know how the market is going to play," he said.

Speaking on the fiscal maths, Bajaj said had the Centre ‘hypothetically’ not allocated Rs 1 trillion to states as long-term 50-year loans for their capex needs for FY23, the fiscal deficit target would have been 6 per cent of GDP. The Centre’s capex outlay for FY23 includes this Rs 1 trillion provision.

Bajaj also said that the government is open to looking into the restaurant industry's demands of going back to a higher goods and services tax (GST) rate, along with the benefit of tax credit on their inputs.

Currently, a 5 per cent tax is levied on restaurant services, irrespective of whether it is air-conditioned (AC) or non-AC, without the benefit of input tax credit. Also, restaurants in starred-hotels that charge Rs 7,500 or more per day room tariff will be levied 18 per cent GST, but input tax credit is allowed to them. Those restaurants in hotels charging less than Rs 7,500 room tariff will charge 5 per cent GST, but will not get input tax credit.

"I also got this suggestion from the restaurant industry that it would like to go back to a higher rate of taxation with input tax credit being allowed to it, rather than (be) only in the 5 per cent tax rate. Which is fine. We would be open to look into this," said Bajaj.

A final decision on the reversal in tax rate for the restaurant industry will be taken by the GST Council, chaired by the FM and state FMs.

Bajaj said this year the attempt will be to bring some changes to the GST framework, so that there is stability and the trade knows the tax rates and can plan accordingly.

The GST Council has already set up a panel of state ministers under Karnataka Chief Minister Basavaraj Bommai to suggest changes to the GST rate structure, trimming of exemption list, and correction in the inverted duty structure to expand the tax base. The panel is expected to submit its report in the next few months, informed Bajaj.

"I appreciate that the GST rates on some of the items need to be brought down to bring parity with others, but there is a need to look at the other side because states this year, once the compensation ends on June 30, are going to face a massive shortfall of funds, maybe exceeding Rs 1 trillion," he said.

There have been demands for merging the 12 per cent and 18 per cent slabs, as also taking out certain items from the exempt category to balance the impact of slab rationalisation on revenue.

Topics :Capital ExpenditureCapital Gains Tax Indian EconomySTCG

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