What is Missing in CBDT FAQ on LTCG ?

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My attention is drawn from the twitter handle of income tax department about the publication of FAQs on changes in long term capital gains provision. A perusal of the Frequently Asked Questions (FAQs) regarding taxation of long-term capital gains proposed in Finance Bill, 2018 clearly showed that  CBDT has become quite proactive in tune with our beloved Prime Minister . But, the frequently asked question published by CBDT, perhaps written in a rush and hurriedly to calm down general public, has overlooked one major amendment. If that amendment which is not discussed properly in the FAQ if left unattended by the government, will surely become more taxing than what people generally perceive the new provision to be.

First Answer Itself is Incomplete

Q 1.             What is the meaning of long term capital gains under the new tax regime for long term capital gains?

Ans 1.         Long term capital gains mean gains arising from the transfer of long-term capital asset. The Finance Bill, 2018 proposes to provide for a new long-term capital gains tax regime for the following assets–

  1. Equity Shares in a company listed on a recognised stock exchange;
  2. Unit of an equity oriented fund; and
  3. Unit of a business trust.

The proposed regime applies to the above assets, if–

a. the assets are held for a minimum period of twelve months from the date of acquisition, and

b.  Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of equity shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition (subject to notified exemptions).

What is missing in the answer?

The answer contained in (b) above is not what is proposed in Finance Bill 2018.The condition described in (b) above was valid for the grant of exemption u/s 10(38 ) and not the new tax regime under the Finance Bill 2018 Under the Finance Bill 2018 , following amendment is done as far as the question of who will get benefit of 10% taxation

31. After section 112 of the Income-tax Act, the following section shall be inserted with effect from the

1st day of April, 2019, namely:—

‘112A. (1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if—

 (i) the total income includes any income chargeable under the head “Capital gains”;

(ii) the capital gains arise from the transfer of a long-term capital asset being  an equity share in a company or a unit of an equity oriented fund or a unit of a business trust;

(iii) securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004  has,—

(a) in a case where the long-term capital asset is in the nature of an equity share in a companybeen paid on acquisition and  transfer of such capital asset; or

(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust,  been paid on transfer of such capital asset.

Most important words that from the aforesaid provision, new provision under section 112A  is applicable only if the STT is paid for all kinds of acquisition!  That conditions cover all the acquisition of shares even before 2004  or any mode of acquisition like bonus ……………

  • So, if the Finance Bill proposal is taken as it is , no person who acquired shares before 01/10/2004 ( The date from which STT became effective ) can avail of 10% taxation u/s 112A because there can not be any chance of paying STT when the STT was in existence.
  • Secondly, people who could not pay STT on rights or bonus shares or shares acquired by another medium will also not be able to claim the benefit of section 112A.

Wait…Wait Law has provided Relief …

I firmly believe this must not be the intention of the government that is the reason the Finance Bill has provided proposal u/ s112A(4) that provides that the conditions are given above in 112A(1)(iii) i.e. STT on all kinds of the acquisition will not apply to certain kinds of acquisition that will be notified in the official gazette

4) The Central Government may,  by notification  in the  Official Gazette, specify  the  nature  of acquisition in respect of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall  not apply.

So, I believe once the Finance Bill 2018 is passed, government will publish a notification in official gazette the nature of acquisition in case of which STT payment will not be required for applying 10% tax u/s 112A. Thus , frequently asked question does not take into account the aforesaid provision and has just repeated the provision applicable for section 10(38) of the Income Tax Act.  CBDT should amend its FAQ with a clarification immediately.