Union Budget 2023-24: Govt mulls options on capital gains tax regime

After the last union budget, outgoing Revenue Secretary Tarun Bajaj had already laid down one of the taxation priorities for the upcoming 2023 Union Budget. He had said that the current capital gains tax regime needs a complete relook and that the various rates and holding periods needed to be streamlined.

“My view is that we need to absolutely relook at capital gains. Whenever I discuss this it creates a lot of friction. I think it is too complicated in terms of rates and holding periods. This is a work in progress for us,” he had told India Inc just days after the 2022 budget.

“We have done some work on this to see what are the rates and periods elsewhere in the world, including in other developing nations and the developed nations. I think a lot needs to be done. The problem is when we rationalise it, some investors would be losers and some would be gainers. That is the difficult part,” he had said.

And indeed, as preparations begin for the next budget, discussions have gained steam around what the government would do with the capital gains tax regime.

On Monday, representatives from various industry bodies presented their pre-budget recommendations to Finance Minister Nirmala Sitharaman and her budget team. Prominent among the recommendations was the rationalisation of capital gains tax. This week, the issue is expected to be raised again in Sitharaman’s pre-budget meeting with capital market participants.

The rates and holding periods of capital gains tax differ for different asset classes. For example, equity and equity mutual funds attract short-term capital gains tax (STCG) of 15 per cent and long-term capital gains tax (LTCG) of 10 per cent for gains above Rs 100,000. The STCG on most bond investments is at the tax slab the investor comes under. However, LTCG is either 10 or 20 per cent depending on whether it is a listed or unlisted bond or a debt mutual fund. For real estate, the LTCG is at 20 per cent. (see table).

“At present, there is no consistency in tax rates or holding period for different types of instruments falling within the same asset class. Even the indexation benefit differs in different situations. The tax rates also differ for residents and non-residents,” the Confederation of Indian Industries said in its recommendations to the Finance Ministry.

CII (Confederation of Indian Industry) has recommended that the holding period be reduced to one year for all capital asset investments except immovable property. It has recommended STGC at a blanket 15 per cent and LTGC at 10 per cent for all market investment assets.

Another industry body, Ficci (Federation of Indian Chambers of Commerce & Industry), recommended that the budget provide clarification on capital gains tax with regards to grandfathering benefits in case of shares received under tax-neutral transfer in lieu of shares held as on January 31, 2018, and that capital gains exemption be expanded to cover the transfer of bonds from non-resident to Indian issuing company as a part of buyback.

While no decision has been taken by the government on whether capital gains tax will be rationalised or not, officials say that, theoretically, it should not be a problem. The revised estimate for direct taxes in FY22 was Rs 12.5 trillion, out of which capital gains tax is said to be just around Rs 70,000 crore.

“If any rationalisation is to be done, the revenue foregone will be very negligible, and could be made up with increased activity in the markets, especially among retail investors. Throughout the year, we have received inputs from market participants on capital gains tax, and all the views are being examined,” said a senior government official.

As an aside, a reduction goes against the practice in some other markets, such as the United Kingdom, the United States, and others that have actually increased capital gains tax over the past few years.

Analysts agree with the government’s assessments but say other factors come into play. “While the tax proceeds have been very healthy this year, the fiscal deficit may still be a challenge and that will inform any decision on whether the Finance Ministry tinkers with capital gains tax or not,” said Samir Kanabar, Tax Partner, EY India.

“In case the government wants to push its divestment programme next year, get more initial public offerings and offers-for-sale done for PSUs, then it makes sense to cut capital gains tax, especially STCG, as that will come as welcome news to retail investors, who usually hold these assets for shorter periods,” Kanabar said.

As to what the FM actually does when she rises to present the budget on February 1, watch this space.