Budget 2016: Easwar panel jettisons obtuse principles on capital gains taxation of equity

The Justice Easwar panel in the run up to the budget 2016 has warmed the cockles of share market investors by jettisoning age-old obtuse principles and instead plumping for refreshingly simple rule of thumbs.

Budget 2016: Easwar panel jettisons obtuse principles on capital gains taxation of equity


If its recommendations were to be accepted, as they should be, all sale of shares after 12 months of holding would be deemed to be giving rise to capital gains, period. And even if the holding period is for less than 12 months, you would not be asked to dismount the capital gains bandwagon if your capital gains were not more than Rs 5 lakh during the financial year, period.

As of now, there is a lot of hairsplitting on whether one’s income from sale of shares is capital gains or business income. The income tax department is loath to assess one under capital gains if it sniffs even a remote possibility of branding the income with the character of business.

The Supreme Court eons ago held in Holck Larsen (founder of Larsen & Toubro) that whether it is capital gains or business income would hinge on a complex set of factors. If the holding period is short, the presumption would be it was business. If the purpose of investment was to nurse it into a sapling and then into a plant and then into a tree, the presumption would be capital gains.

And if periodic offloading in the market by the promoter was to maintain floating stocks at the optimum level in the market instead of booking profits, once again the presumption would be in favor of investment and the eventual income being capital gains just as recycling of profits into the share market albeit into another scrip would give rise to the same presumption.

The above principles are a theoretician’s delight but a laity’s nightmare. Small wonder, often the taxpayer and the department locked horns in protracted and expensive legal battles with the stakes being high for both.

What are the advantages of being assessed for capital gains? Plenty. Flat 15% tax if it is short-term (holding period not more than 12 months) through recognized Indian bourses no matter whether you are already in the maximum 30% bracket. And if you could bide your time and sit tight on your shares for more than 12 months, confetti will pour on you.

Complete tax exemption if the sale is through a recognized Indian bourse with just a slap on the wrist---securities transactions tax. And if sold through private deals, like accepting the public offer made by an acquirer in a takeover, a flat 20% tax after the cost of shares is inflated by cost-inflation index.

To wit, if I got Rs 750 from Daiichi Sankyo for 100 shares in Ranbaxy when the market price was just Rs 450, I will be taxed lightly. If suppose I had acquired them ten years ago for Rs 20 each and in the meanwhile the cost inflation indexed has doubled, my indexed cost would now be Rs 40 per share. And I will have to pay the soft 20% tax on selling price as reduced by the index cost. If I am tax-averse, there are two tax shelters---I can invest the long term capital gains in REC or NHAI bonds or invest the proceeds in a house and claim full exemption.

It would be clear from the above why there is a mad scramble on the part of share market investors to get into the capital gains bandwagon and correspondingly why the department is keen on assessing them under business. In computing business income, no flat concessional rate or tax shelters are available.

Justice Easwar must have seen it all right from his Tribunal days in Chennai to his career as judge at the Delhi High Court. Such hairsplitting does no one any good. He has therefore come up with some rules of thumb which are by no means quick fixes.

If anyone has bided his time for 12 months in what is admittedly a volatile market, his seriousness should not be doubted---he must be rewarded with the investor status as opposed to the businessman status.

Similarly if he has made not more than Rs 5 lakh, he ought not to be branded as a businessman. Fair enough. The department of course will have to gird its loins and look for those trying to split their income from bourses. Splitting indeed has been the quick riposte of tax evaders ever since income tax was imposed.

If the profit from bourses is Rs 20 lakh, arrange your paperwork with prescience and show as if it was earned by 4 persons so that each has earned not more than the danger-mark figure---Rs 5 lakh.

Incidentally, the 12 month criterion Easwar panel applies for making the grade for assessment under the agreeable capital gains is also the cut off point for making the long-term capital gains grade. Easwar has while doing a service to investors has also ensured that the market is less volatile thanks to people now sitting on their investments for 12 months before bestirring.

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Updated Date: Feb 17, 2016 14:50:58 IST

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