LTCG exemption, clarity on dividend taxation top markets' Budget wish list

Industry players want govt to bring tax parity between Ulips and equity MFs, cut in STT and CTT

As in previous years, capital market participants have a number of expectations from the Union Budget this year. A number of these are long-standing demands, whereas a few have stemmed from the budgetary changes effected last year. Business Standard takes a look at some of the key industry proposals and changes that the government might consider ahead of this year’s Budget:

LTCG and STT

Industry players are hopeful that the government will exempt tax on long-term capital gains (LTCG) arising on sale of listed equity shares. The government could also streamline the holding period for granting such exemption to 24 months, bringing the same at a par with unlisted shares.

“Abolishing the much-criticised LTCG tax would be a welcome move. A widely discussed point of note is redefining the concept of long term to two years and the change of taxation to zero. This can bring stability to the duration of investments across financial assets,” said Tejas Khoday, co-founder and CEO, FYERS.

Reduction in the quantum of Securities Transaction Tax (STT) and Commodity Transaction Tax (CTT), has been a long pending demand as well.

“If LTCG is here to stay, then levy of STT should be rationalised since STT was introduced as a replacement for LTCG tax,” said a senior official from a tax consultancy firm.

Tax parity between Ulips and MFs

Industry players are hoping that the government will bring tax parity between unit-linked insurance plans (ULIPs) and equity mutual funds, both of which are investment products and invest in securities. Currently, ULIP investors do not have to pay capital gains tax on switching. There is no STT levied on the withdrawal proceeds and no income-tax (I-T) on the proceeds from ULIPs of insurance companies, including early surrender and partial withdrawals (subject to certain conditions).

The Securities and Exchange Board of India’s (Sebi’s) ‘Long-Term Policy for MFs’ published in February 2014 had emphasised the need to eliminate tax arbitrage and that similar products under different regulators should get similar tax treatment.

Mutual Funds

The Association of Mutual Funds in India (Amfi) has made a pitch for launching pension plans as ‘MF-Linked Retirement Plan’ (MFLRP), which will be eligible for tax benefits under Sections 80CCD (1) and 80CCD (1B) of the I-T Act, 1961, with ‘exempt-exempt-exempt’ status.

Where matching contributions are made by an employer, the total of employer’s and employee’s contributions should be taken into account for calculating tax benefits for such plans. Contributions made by the employer should be allowed as an eligible ‘Business Expense’ under Section 36(1) (iv a) of the I-T Act, 1961.

Amfi wants switch transactions from one mutual fund plan/option to another within the same scheme of a fund house to be exempted from capital gains tax.

Foreign portfolio investors (FPIs)

The government may re-examine tax laws that deal with withholding tax on dividends for FPIs. At present, companies withhold tax at the rate of 20 per cent plus surcharge and cess on the dividend paid to FPIs, even if they invest from a jurisdiction that provides for a lower rate based on India’s double tax avoidance agreement with that country. The lower rate could be five per cent, 10 per cent or 15 per cent.

Industry players are also hopeful the government will increase investment limits and ease restrictions for investment in bonds, with a view to help India become part of the global bond indices.

Brokers

Association of National Exchanges Members of India (ANMI) has requested the government to rationalise the goods and services tax (GST) rates for the broking industry. Anmi has also requested the government to do away with the concept of speculative income and limit income classification arising out of capital market transactions to business income, long-term capital gain, and short-term capital gain. This is because too many classifications created fungibility problems regarding profits or losses incurred in different trades. For example, intraday cash market trading is classified as speculative income, but intraday derivative trade is classified as business income.

Miscellaneous

A 2020 September circular had clarified that TCS would not apply to transactions in securities which are traded through recognized stock exchanges. “No exclusion has been made for other securities, which may potentially fall within the meaning of ‘goods’. This exclusion should be extended to all securities (listed as well as unlisted), including mutual fund units,” said Rajeev Dimri, National Head of Tax, KPMG India.

The Finance Act, 2020 provided for deduction of interest expense incurred against the dividend. The deduction should not exceed 20 per cent of the dividend income received. However, one cannot claim a deduction for any other expenditure incurred for earning the dividend income.

“No deduction is currently allowed against dividend income except interest. All expenditure incurred by the taxpayer to earn dividend income should be allowed under Section 57 of the IT Act,” said Dimri.

The other long-standing demand is for Category-III AIFs to get a pass-through status, similar to what was provided for Category-I and Category-II AIFs in 2015.