The Parthasarthi Shome panel has recommended that the government should abolish the tax on gains arising from transfer of listed securities, be it in the nature of capital gains or business income, to both residents as well as non-residents.
The tax depends also on the nature of income, whether business profit or capital gains. At present, short-term capital gains on equities are taxable at the rate of 15 per cent. Holding period of less than one year is considered as short term.
Business income is taxed at 30 per cent. Distinguishing capital gains and business income depend on several factors, and disagreements have resulted in numerous litigation cases between the revenue department and taxpayers, the panel said.
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Under these circumstances, the proposal to exempt these transactions from all tax is the most significant of the Shome panel proposals, say tax experts. Sudhir kapadia, national tax leader, Ernst and Young, said the suggestions on capital gains were “the most far-reaching and have got everyone by surprise.”
According to Kapadia, the move if implemented will make the Mauritius route redundant. “Since both resident as well as non-resident investors would not be required to pay tax on capital gains, foreigners need to use Mauritius. It will attract pooling of funds in India itself,”he added.
A significant outcome of the present tax regime is that fund managers of foreign investors do not base themselves in India as the presence of fund managers would constitute permanent establishment of such investors in India. Consequently, the business income of foreign investors would be taxed in India. The abolition of tax on portfolio investment may encourage fund managers to shift their bases to India.
The panel has received representation from stakeholders who indicated that several countries do not tax gains from the transfer of listed securities. “They submitted that slowdown in the world economy has impacted investments into India. The FDI (foreign direct investment) inflow in the first quarter of 2012-13 has been less than half compared to last year. The issue raised was whether India should implement GAAR (General Anti-Avoidance Rule) at this stage, particularly in the context of foreign inward investments,” the report said.
Foreign institutional investors (FIIs) make portfolio investments in listed securities as per the Securities and Exchange Board of India guidelines. Currently, all these transactions in listed securities are subject to Securities Transaction Tax (STT). Long-term capital gains (on holdings for more than 12 months) are exempt from taxation; and short-term capital gains are taxable at 15 per cent.
The panel has said the government might consider increasing the rate of STT appropriately to make the proposal tax neutral. Earlier this year, STT was cut to 0.1 per cent on delivery-based capital market transactions.
The panel put the present revenue from taxation of capital gains from such securities at less than Rs 3,000 crore. “However, there would be some revenue foregone on account of non-taxation of short-term capital gains in the case of FIIs who avail treaty benefit (mainly India-Mauritius and India-Singapore tax treaties).”
