FB 2018- Exemption for Long-term capital gains with STT book LTCG before 31st March, 2018 by selling and delivery well in time before 31.03.18 taking care of Holiday.

[CA DEV KUMAR KOTHARI]

Exemption under simplified scheme of taxation:

Exemption u.s.10 (38) was introduced by FA (No.2) Act 2004 w.e.f. 01.04.2005. This was  as a measure of simplification simultaneously with introduction of Security Transaction Tax (STT). STT was in lieu of income-tax hence exemption from tax on LTCG was allowed and STCG were taxed at lower rate.

Budget proposal:

In budget it is proposed to discontinue exemption u.s. 10 (38) though levy of STT will continue.

While continuing STT, withdrawal of exemption is not at all justified.

Whether exemption was effective:

In case of companies, though LTCG with STT was exempt u.s. 10 (38) but the same were taxable by way of tax on book profits as per provisions of S. 115JB.

Booking profit:

After the present budget, valuation of quoted shares have fallen heavily and chances of booking profit seems dim.

However, as usual there will be some improvement in near future and one can find opportunity to book profit.

Don’t wait for last moment:

It is desirable that profit should be booked well in advance. Last suitable trading day is 27.03.18 (Tuesday) for which settlement will be on 29.03.18 (Thursday) on basis of T+2 days.

30.03.18 Friday is a trading and settlement holiday for Mahavir Jayanti.

Thereafter 31.03.18 and 1^st April  are also holidays.

So to be doubt free it is desirable that shares should be sold on or before 27.03.18 (Tuesday) so that settlement date will be 29.03.18 (Thursday) and delivery can be made before 31.03.18. Care should be taken to deliver shares, in case of delay in delivery beyond 31.03.18 exemption will not be allowed.

This is also advisable because at the last moment, when lot of people will book profit, the valuation of shares are likely to fall.

Shares sold in trades after 27.03.18 will not be settled and delivered before 310318.

Similarly in case of equity oriented units also, investors can plan to book long-term profit well in advance.

Receipt of payment within 31 03 18 is not material for this purpose.

Stock Exchange can make special plans:

As special case Stock Exchange can plan to cancel Holidays and make arrangement for trading and settlement (Iike muhurut trading  on Diwali, it can be yearend closing trading)  so as to ensure delivery within 31.03.18, with help of other concerned for settlement of trades on 31.03.18 so that investors can avail benefit. However, it may not be possible and require very special arrangements which may not be possible. So investors are advised to sell well in time to ensure delivery of shares/ units before 31.03.18 to avoid any doubt and litigation.

New provision proposed for taxing LTCG @10%  if more than Rs. one lakh:

 A new scheme of taxation @ 10% is introduced by insertion of a new section , namely Section 112 A which has been discussed by author in another article webhosted on 02.02.018 on this website. The new provision is far more complex and people will find its compliance with difficulties.  As per new provision LTCG subjected to levy of STT will be taxable if such LTCG exceeds Rs. one lakh in case of any assessee including FII. Amendment in S. 115AD has also been proposed to tax LTCG in hands of FII if LTCG exceed Rs.one lakh in a previous year.

Therefore, in case of companies liable to tax u.s. 115JB, new provisions may be  beneficial because once tax is imposed under special provisions of Section 112 A, the same will not form part of bool profit if credited in capital reserves.

The FM expects to garner about ₹ 20000 crore from tax u.s. 112A. However, it may not materialize. This is due to reason that many times LTCG were booked for improving capital base of seller , and investments were purchased after some time and  held by purchasing in other account of associates.

Besides when exemption was there, some investors used to sell securities when price was reasonably high and buy back at lower rates, after few days or months when price fell and again to hold for a period of 12 months or more and then sell at profit. In such cases rollovers at 12-15 months could bring into some gains with small cost of STT.

However, after increase of GST on various related services rendered by brokers and stock exchanges transaction cost has increased. When exemption is withdrawn, such periodical roll overs of investment at intervals of more than 12 months will be reduced.

 

Proposal for amendment of S.10 (38) is reproduced below with highlights added:

 

THE FINANCE BILL, 2018

5. Amendment of section 10.

In section 10 of the Income-tax Act,––

XXX

(b) with effect from the 1st day of April, 2019,––

 (iii) in clause (38), after the third proviso, the following proviso shall be inserted, namely:-

“Provided also that nothing contained in this clause shall apply to any income arising from the transfer of 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, made on or after the 1st day of April, 2018.”;

Explanatory memorandum: 

Clause 5 of the Bill seeks to amend section 10 of the Income-tax Act relating to incomes not

included in total income.

XXX

Clause (38) of section 10, inter alia, provides for exemption from tax on the income arising 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 subject to certain conditions specified in the said clause.

It is proposed to amend the said clause so as to provide that the provisions of said clause shall not apply to any income arising from the transfer of 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, made on or after the 1st day of April, 2018.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent years.