3-Feb-2018: Budget proposes to bring back LTCG tax
What is long-term capital gains (LTCG) tax?
It is the tax paid on profit generated by an asset such as real estate, shares or share-oriented products held for a particular time-frame. The definition of Long-term Capital Gains, or LTCG, is different for various products.
Why is LTCG tax in the news now?
Finance Minister Arun Jaitley, in his Union Budget speech, re-introduced LTCG tax on stocks. Investors will have to pay 10 per cent tax on profit exceeding Rs 1 lakh made from the sale of shares or equity mutual fund schemes held for over one year. Till now, LTCG was exempt from tax. The definition of a long-term investor in stocks for tax purposes is one year. LTCG tax on stocks was scrapped in 2004-05 by then finance minister P Chidambaram.
The budget talks about 'grandfathering' in LTCG. What is that?
The 'grandfathering' clause is the exemption granted to existing investors or gains made by them before the new tax law comes into force. Whenever the government introduces a stricter tax law, it has to ensure that investors who have committed money keeping in mind the easier tax regime are protected. In the matter of LTCG tax on shares, the government said gains from shares or equity mutual funds made till January 31, will be grandfathered - or exempted. There will be no LTCG tax on notional profit in shares till then.
So, who will come under the new LTCG tax net?
The Budget proposes that LTCG tax will have to be paid on profit booked after March 31. This means that for sale of shares made till March, the existing law will apply and this tax will not be applicable. In short, if you sell before March 31 a stock that has been held for more than a year, you do not pay tax. So, for tax purposes, there should not be any motivation for investors to sell in February and March. However, if you sell it on or after April 1, LTCG tax will apply on the gains made.
Also, this tax is applicable only if LTCG is above Rs 1 lakh in a financial year. So, if an investor made long-term gains of Rs 150,000 in a year, LTCG tax is applicable only for Rs 50,000 (Rs 150,000-100,000).
How will LTCG tax be calculated since gains till January 31 have been grandfathered?
If an investor sells stock or equity mutual fund held for over a year after April 1, LTCG tax will be calculated on the basis of the acquisition price or closing price on January 31, whichever is higher. Take the example of a stock purchased on January 15, 2017, for Rs 100, which closed at Rs 200 on January 31, 2018. If sold after March 31, LTCG tax will be calculated based on the closing price of January 31, which is higher.
7-Jul-2017: Mauritius keeps tax treaty with India outside purview of MLI
Mauritius has notified 23 of its tax treaties for modification by OECD’s Multilateral Instrument (MLI) to implement tax treaty-related measures to prevent Base Erosion and Profit Shifting (BEPS). However, it has kept its double taxation avoidance treaty with India out of the purview of the global agreement that seeks to prevent companies from avoiding taxes. The move to exclude India is expected to address the concerns of overriding impact of MLI on the revised tax treaty between India and Mauritius.
Mauritius’ move to keep the bilateral tax treaty with India outside the covered agreements for MLI would mean that the terms of MLI would not apply to any transaction entered between tax residents of India and Mauritius. This also indicates that the tax treaty related BEPS measures will not impact investments in India routed through Mauritius, particularly the grandfathering of investments provided through the amendment to the bilateral tax treaty in May 2016.
The multilateral instrument (MLI) is a legal instrument designed to prevent Base Erosion and Profit Shifting (BEPS) by multinational enterprises. BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. The MLI allows jurisdictions to transpose results from the OECD/G20 BEPS project, including minimum standards to implement in tax treaties, to prevent treaty abuse and “treaty shopping”, into their existing networks of bilateral tax treaties in a quick and efficient manner. It was developed through inclusive negotiations involving more than 100 countries and jurisdictions, under a mandate delivered by G20 Finance Ministers and Central Bank Governors at their February 2015 meeting. The OECD is the depository of the MLI and is supporting Governments in the process of signature, ratification and implementation.
31-Jan-2017: Income Tax Department (ITD) launches Operation Clean Money
Income Tax Department (ITD) has initiated Operation Clean Money. Initial phase of the operation involves e-verification of large cash deposits made during 9th November to 30th December 2016. Data analytics has been used for comparing the demonetisation data with information in ITD databases. In the first batch, around 18 lakh persons have been identified in whose case, cash transactions do not appear to be in line with the tax payer’s profile.
Data analytics will be used to select cases for verification, based on approved risk criteria. If the case is selected for verification, request for additional information and its response will also be communicated electronically. The information on the online portal will be dynamic getting updated on receipt of new information, response and data analytics.
The response of taxpayer will be assessed against available information. In case explanation of source of cash is found justified, the verification will be closed without any need to visit Income Tax Office. The verification will also be closed if the cash deposit is declared under Pradhan Mantri Garib Kalyan Yojana (PMGKY).
The taxpayers covered in this phase should submit their response on the portal within 10 days in order to avoid any notice from the ITD and enforcement actions under the Income-tax Act as also other applicable laws.