Budget 2018 – Decoding proposed Long Term Capital Gain (LTCG) Tax

One of the biggest items that came out from the recent Budget has been the reintroduction of Long Term Capital Gain (LTCG) tax. This tax is applicable on gains arising from sale of  :

• Equity Shares in a listed company on a recognized stock exchange
• Units of Equity Oriented Mutual Funds; and
• Units of a Business Trust

The proposed tax is applicable to above assets if:

• They are held for a minimum of 12 months from date of acquisition
• The 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

(As per Notice by Ministry of Finance, dated 4^th February, 2018)

There are two major points in regards to the proposed regime:

1. The LTCG tax will be at a flat 10% for any long term gains in excess of Rs 1 lakhs, starting from Financial Year 2018-19 i.e. 1^stApril, 2018. In other words, all long term capital gains realized up until 31^st March, 2018 will be exempt from the proposed tax.
2. There is a “Grand Fathering” clause, which in essence ensures that all notional/realized long term capital gains up to 31^stJan 2018 will remain exempted from the proposed tax. This means that effectively the closing price of 31^st Jan 2018 would be the cost price for LTCG calculations.

How would the Long Term Capital Gains Tax be calculated?

If you sell after 31.3.2018 the LTCG will be taxed as follows:

The cost of acquisition of the share or unit bought before Feb 1, 2018, will be the higher of :
a) the actual cost of acquisition of the asset
b) The lower of : (i) The fair market value of this asset(highest price of share on stock exchange on 31.1.2018 or when share was last traded. NAV of unit in case of a mutual fund unit) and (ii) The sale value received

Scenarios for computation of Long Term Capital Gain

• Scenario 1:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31^st Jan 2018 was Rs 200 and it was sold on 1^st April 2018 at Rs. 250.

As actual cost of acquisition is less than FMV, the FMV will be considered as cost of acquisition and therefore the LTCG will be Rs. 50 (Rs. 250 – Rs. 200)

• Scenario 2:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31^st Jan 2018 was Rs 200 and it was sold on 1^st April 2018 at Rs. 150.

Actual cost of acquisition is less than FMV. However the sale value is also less than FMV. Therefore the sale value will be considered as cost of acquisition and therefore the LTCG will be NIL (Rs. 150 – Rs. 150)

• Scenario 3:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31^st Jan 2018 was Rs 50 and it was sold on 1^st April 2018 at Rs. 150.

As actual cost of acquisition is more than FMV, the actual cost of acquisition will be considered as cost of acquisition and therefore the LTCG will be Rs. 50 (Rs. 150 – Rs. 100)

• Scenario 4:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31^st Jan 2018 was Rs 200 and it was sold on 1^st April 2018 at Rs.50.

Actual cost of acquisition is less than FMV. As sale value is less than both the FMV and actual cost of acquisition, the actual cost of acquisition will be considered as cost of acquisition and therefore there will be Long Term Capital Loss of Rs. 50 (Rs.50 – Rs. 100). Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the IT Act.

Note, there is no clause of indexation on cost of acquisition. Setting off cost of transfer or improvement of the share/unit will also not be allowed.

 

LTCG on these instruments realized after 31.3.2018 by an individual will remain tax exempt up to Rs 1 lakh per annum i.e. the new LTCG tax of 10% would be levied only on LTCG of an individual exceeding Rs 1 lakh in one fiscal. For example, if your LTCG is Rs 1,30,000 in FY2018-19, then only Rs 30,000 will face the new LTCG tax.

What should you do now with your Equity Portfolio?

Even with the reinstatement of this tax, we believe that equities are still an efficient post tax investment avenue. We would therefore continue to recommend to remain invested in equities provided the investment horizon is long. Alternatively, if you require monies in the short term, this may be a sound window to book profits and shift to less aggressive avenues.

 

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GST – What it could mean for you?

The Goods and Services Tax is one of the biggest reform agendas of the BJP government. The Finance Minister has indicated that it can raise India’s GDP by one to two per cent per annum, which is very substantial. So what really is GST and how does it work?

Why GST?

Currently, indirect taxes are imposed on goods and services. In the current system, taxes applicable to the manufacturing sector are Central Excise Duty, Value Added Tax( VAT), Central Sales Tax and a range of cesses. Other taxes like Entry Tax, Octroi, State cesses ,etc. are also applicable. For the services sector, service tax and cesses are applicable. Some of these taxes are levied by the centre and some by the states. For taxes imposed by states, the tax rates may vary across different states. Further, goods and services were taxed differently, thereby making the taxation of products complex. Some of these challenges are sought to be overcome with the introduction of the Goods and Services Tax (GST).

How much will the GST rate be?

This is currently yet to be decided. As per a survey by a leading tax firm, the top 10 tax rates across the globe range from 18 per cent to 27 per cent. Thus, the choice on the rate of the GST is fairly important, as in a services driven economy, a high GST rate could cause inflation initially, resulting in interest rates once again starting to rise, which could be negative for bonds. It is therefore critical for the GST rate to be set in a manner where the significant efforts of both the government and the RBI to control inflation are not negatively impacted as a result of a high GST rate. In addition, there could be challenges around the implementation due to the plethora of taxes involved, and it could take a couple of years before the benefits are completely visible.

Of course, with respect to businesses, since we have a very complex tax structure in India, it makes it difficult for businesses as they are expected to fulfill multiple legal obligations. GST will simplify the process as a result reducing the operating cost which can be passed on to consumers. This could be beneficial for equity investors, once the teething challenges are addressed.

 Impact on certain sectors

Initially, GST may not apply to: (a) petroleum crude, (b) high speed diesel, (c) motor spirit (petrol), (d) natural gas, and (e) aviation turbine fuel. The GST Council will decide when GST will be levied on them.

GST implementation may have an impact on certain sectors. Auto sector could benefit from reduction in duties on large SUVs and cars as GST rate is likely to be lower than the present excise plus VAT rate. There could also be lower entertainment taxes. This may lead to increase in margins of companies in the entertainment industry. In the telecom sector increase in service tax will be passed on to the consumers.

Let’s take a look at impact of GST to a home buyer. Service tax is applicable on under-construction property. This is so because, in case of an under-construction property, the developer is deemed to be the provider of construction services to the home buyer, and hence service tax is charged on the cost of construction. It is not charged on the entire value of the property but only to the extent of cost of construction. This means that cost of land is excluded.

Besides the basic cost of the unit, a home buyer also has to pay additional charges for facilities such as preferential location, car parking, club membership, rain water harvesting and others. All these are subject to service tax, which could see an increase due to the introduction of GST instead at a higher rate than the current rate of service tax.

Moreover, if one has taken a loan to buy the property then service tax relating to loan processing fees and home insurance are applicable. With respect to stamp duty on immovable property there is no clarity up till now.

With the implementation of GST, there could be uniformity in prices of gold all over the country. Right now taxes like Octroi and VAT are applicable which differ from state to state. This standardization will make consumers in some states pay more than they were paying before and vice versa.

All in all, it does seem like GST could be great news for the Indian economy and Indian equity markets in the longer term, but could trigger higher inflation and higher costs for services, including real estate in the shorter term.

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