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00:00We're just days away from the presentation of the Union Budget 2024
00:04and we've been discussing what could be taken up by Finance Minister Nirmala Sitharaman.
00:09Will the thrust on infrastructure and defence continue for one
00:13and from the perspective of the individual taxpayer will there be any relief provided?
00:20But what about the investor?
00:21The call to rationalise capital gains tax has been repeated consistently for several years now
00:27and in 2024 there are several reasons why this should be considered.
00:32We're going to talk about all of those reasons with our guest today.
00:36We've got Pranav Saita, Tax Partner at EY joining me in studio.
00:40Pranav, thanks so much for taking the time.
00:41Thank you.
00:42To set the context, I want to actually go to my colleague first.
00:45We've got Mahima Vachrajani joining us to talk about the treatment of various asset classes
00:52and the fact that they are in fact treated very differently when it comes to capital gains tax.
00:57Mahima, what can you tell us?
00:59Alex, I'll straight away start with equities first.
01:02For equities, the short-term capital gain, if it's less than one year and more than that,
01:07is long-term capital gain.
01:09The short-term capital gain rate is 15% and LTCG is at 10%.
01:13Now, of course, LTCG is exempt up to 1 lakh rupees.
01:16For real estate, similarly, short-term capital gain is below 2 years and more than 2 years
01:22is long-term capital gain.
01:24In this case, short-term capital gain is taxed at slab rate and LTCG rate is 20% plus indexation.
01:31In terms of gold, well, for gold, short-term capital gains
01:35is considered when it's less than 3 years and more than 3 years is, of course, long-term capital gain.
01:41For gold as well, short-term capital gains is taxed at slab rate and for
01:46long-term capital gain, it's 20% with indexation.
01:49Now, in terms of fixed income mutual funds, all gains are taxed at the slab rate.
01:53For listed corporate bonds and government bonds,
01:56short-term capital gain is considered if it's less than one year
01:59and more than one year is considered as long-term.
02:01And in terms of short-term capital gain, it's taxed at slab rate and long-term is at 10%
02:07and this is without indexation.
02:09And lastly, unlisted debt securities, for this,
02:12short-term capital gains is considered when the security is held for less than 3 years
02:18and long-term capital gain when the securities are held for more than 3 years.
02:22And for this as well, short-term capital gain is taxed at slab rate and LTCG is at 20% with indexation.
02:29So, these are the various ways where different asset classes are taxed.
02:33Absolutely.
02:33Thanks so much, Mahima, for getting us those details.
02:35Now, you've probably experienced this yourself and
02:39you probably had conversations about this, tax can be a little complicated.
02:43But Pranav, is this more complicated than it should be?
02:48Oh, I think so, yes.
02:49There's no doubt about it.
02:50Even I would have to go back to the book and refer
02:53what the tax treatment in certain situations will be
02:56because of the fact that over a period of time and very legitimately,
03:00various things have evolved with the result that it's become quite complex.
03:04Depending on the nature of the asset,
03:06whether it is financial instruments or otherwise,
03:09within financial instruments, what is exactly the nature of the asset?
03:13What is the period of holding?
03:14Has the transaction been on market or off market?
03:17Is it STT paid or not paid?
03:19The period of holding, whether it should be 1 year, 2 years, 3 years.
03:23And it's gotten quite complex over a period of time just because of the way in which it has evolved.
03:28And then again, within the nature of the asset,
03:31apart from the status of the SSE resident, non-resident and so on,
03:34whether the nature of the asset, if it is retained with units,
03:38there are certain things for long term, short term, 3 years.
03:41For other listed securities, it's something else.
03:44So it's just getting a little too complicated.
03:46And people tend to probably go back every time and figure out
03:49to figure out what exactly will be the tax treatment.
03:52That's not a hallmark of a great tax regime.
03:56A great tax regime normally should be simple
03:59so that the taxpayer pretty much knows very easily
04:02what is his likely tax liability in certain situations.
04:06So I think there is a need, a real need,
04:09to simplify and rationalize the capital gains tax regime
04:12rather than have too many categories of assets and too many different treatments.
04:17It would be good to have a few, very few categories
04:21and very clear logic and rationale for those 3 buckets or 2 or 3 buckets
04:27and the tax rates, the period of holdings and so on,
04:30being very clearly clarified for each.
04:32We will talk about what an ideal scenario would look like.
04:35But before we do, I would like to talk about the elephant in the room,
04:40if you can call it that, because every time there is buzz
04:43about an increase in the capital gains tax on equity,
04:46then equity markets react.
04:48If at all there is an announcement in the budget pertaining to
04:51the increase or the decrease in long term capital gains tax,
04:54then there is a massive, massive reaction.
04:57The last time there was a change, it was 2018,
04:59but I want to go back all the way to 2004,
05:02because this is when long term capital gains tax was removed,
05:07STT, Securities Transaction Tax, was introduced.
05:11The interpretation for those that were not really tracking the market
05:14or taxation at the time is that one was introduced in lieu of the other.
05:19Is that the right interpretation?
05:21Oh, absolutely.
05:22And that was very clearly brought out in the Finance Minister's speech in that year.
05:26I think it was Mr. Chidambaram,
05:29who introduced the Securities Transaction Tax just to simplify the tax regime
05:35and make the collection of taxes also very simple
05:37and for taxpayers not to worry about the tax
05:40while deciding whether they are buying, selling,
05:43the point of time of buying and selling and so on.
05:46So essentially, it was introduced as a simplification measure
05:50and as a substitution of the long term listed securities capital gains tax.
05:58And in that year itself, I think the collections were pretty robust.
06:03I think it was less than 12,000 crores.
06:06But I mean, in fact, 12,000 crores was about in 17, 18, if I recall right.
06:13And from that itself, in the last six, seven years,
06:17the collections have tripled.
06:18In 2004, it was pretty nominal.
06:20In 17, I think it was less than 12,000 crores.
06:24Now it's expected to be as per the budget estimates for this year's interim budget.
06:29It's expected to be more than 36,000 crores.
06:32And if the actual numbers are to be looked at, probably it will be much more than that.
06:36Because we have data from April to June this year.
06:39And incidentally, it's a 128% increase on a year on year basis.
06:44We're talking about 16,000 plus crore rupees
06:47just in those three months.
06:49Correct.
06:49So I have no doubts that that 36,000 number will be busted in all probability unless
06:54the budget upsets the capital market, so to say, which is unlikely.
06:57So the reason why last year it was 32,000 crores for the full year revised estimate
07:02for 23, 24.
07:03And this is a three months you're saying it.
07:05Yeah.
07:05So this is a factor of the number of investors and the volume of transactions ultimately,
07:09right?
07:10And with the kind of increase in the participation in the equity markets,
07:14you've seen this value go up as well.
07:17Now, talk to me about, say, it's 20 years of STT.
07:20It's done well, to say the very least.
07:23And it will do well.
07:24But the reintroduction of long term capital gains, people were not, tax, people were not
07:30too happy about that.
07:31Of course, there was grandfathering and all of that.
07:33But then now there's, or there was buzz in the run up to the budget that it could be
07:39raised again.
07:40Is there a case for that?
07:42Well, I don't think it is very likely.
07:45Of course, one can never rule out anything.
07:47I don't think it is very likely because I think even the government realizes that this
07:51was in addition to the STT in any case.
07:55Second, I think there is a realization that Indian investments into productive assets,
08:02like securities and shares and financial instruments, is something that is really charging
08:08up the economy, and to an extent, even giving a flip to entrepreneurship.
08:13So I personally do not think that this 10% is likely to go up.
08:17But yes, indeed, there is a buzz or there is, there is fear, let's put it that way,
08:21that it could go up in under the guise of simplification and rationalization of the
08:27capital gains tax regime.
08:29Well, I do think if at all, one hopes not, but one cannot be sure, if at all, probably
08:36the short term capital gains tax could go up from 15%.
08:40But I do not anticipate the long term capital gains tax going up from 10% because of the
08:46various factors, one that we are talking of investments in productive assets, it is the
08:51domestic investor, who has really ensured that capital is available in what was otherwise
08:57always regarded as a capital starved country.
08:59So while foreign investments have been really very tempered, very, very, you know, moderate,
09:06so to say, if I might say so at all, it is the domestic investors who've kept the capital
09:11markets, the flow of capital into business really sustained.
09:14So I don't expect the long term capital gains tax to go up in this budget.
09:18Short term capital gains tax could be probably because of the fact that only one year is
09:24long term.
09:25And there is a feeling that one wants to probably temper the euphoric mood or the stampede in
09:32capital markets where people want to trade and do even F&O kind of deals, and so on.
09:38So that tempering probably and getting a little more longer term mindset might be the philosophy.
09:43And at the same time, 15% looks a real good rate.
09:46Of course, with STT in place, even that can be probably debated.
09:51But I'm just telling you what probably at worst could happen is my feel.
09:55Based on the share of India and global derivative trade, it wouldn't be
10:00an exaggeration to call India traders market.
10:03But having said that, let's talk about how what you said could pan out.
10:07A rationalization of the treatment of capital gains could result in an increase in the tax
10:15ultimately.
10:16And my curiosity is whether this can take place without even changing the rates.
10:22Because if you were to, for example, say that all capital gains will be considered long
10:28term if it breaches two years of it breaches three years.
10:32Automatically, people selling at less than two years will be taxed at 15%.
10:37So you're ultimately increasing the tax collection.
10:39Undoubtedly, that that also is something that cannot be ruled out.
10:42So one is a tax rate.
10:44Second is the period of holding.
10:46One cannot rule that out.
10:47And and if we look at the international scenario, there are different countries
10:52having very different models.
10:53How do they work?
10:54So, for example, there are some countries who don't distinguish between long term and
10:59short term at all, like Canada, UK and so on.
11:02Denmark, for that matter, Indonesia.
11:04So they don't differentiate between the two.
11:06There are some like US, Australia, etc, which have the one year rule.
11:11Some countries like France have the two year rule for the cutoff between long term and
11:15short term.
11:15So there are very different models.
11:17But I think in India, this one year model has worked quite a lot, quite well for a long,
11:23long time.
11:24And I would feel this government has focused very rightly on maintaining some form of stability
11:31in the tax law, which is a great virtue, because investors, whether in India or abroad, are
11:37looking for predictability, are looking for stability, are looking for some form of certainty
11:42when they are taking longer term decisions.
11:44So I do not think this government is normally induced with the desire to tinker too much.
11:51So I'm not anticipating that.
11:53But yes, that's another way of probably saying that if you extend the period from 12 months
11:57to 24 months, you automatically within that one year, 12 to 24 months, whoever sells pays
12:0315 instead of 10% if the rates remain the same.
12:07Certainly a possibility.
12:08I wouldn't rule it out.
12:09But I hope that's not something that they are looking at.
12:12Okay, so it's not the ideal solution.
12:13I do not think so.
12:15Okay, so before we get into the ideal solution, I also want to talk about this interesting
12:19announcement that came, if I'm not mistaken, correct me if I'm wrong, last year.
12:22We're talking about fixed income mutual funds, where you invest in listed corporate bonds,
12:29which now it's going to be easier to do because the face value is going to be lower.
12:34And the treatment of capital gains there is that if it's less than three years, it's going
12:39to be short term capital gains.
12:40If it's more than three years, you will be taxed at 20% with indexation benefits, the
12:45result of which is that your tax incidence is very low, comparatively.
12:49But if you invest in the same asset through a mutual fund, everything is considered short
12:55term capital gains and you are taxed at slab rate.
12:58Isn't there a bit of an issue here?
13:00So the long term benefit might still be available, but the indexation is not available because
13:05of the amendment that we got last year.
13:07And I do feel it's not the ideal thing.
13:12Because for the simple reason that when it comes to a capital gain and in an economy
13:17like India, to the extent there is no real gain and the gain is nothing but inflation,
13:23then to tax that is something that doesn't sound very fair.
13:28And therefore, I would feel that when they do rationalize, and I'm hoping that when they
13:32do rationalize the capital gains tax regime, one of the things that they would do is not
13:38tax just inflation, but tax real income, which is income beyond the indexation or the
13:45inflation rate for that period.
13:48Right now, I am not too sure whether this budget will restore that particular thing.
13:52But whenever they look at a larger revamp and simplification rationalization of the
13:58capital gains tax regime, our ask has always been through various forums, that you must
14:04have indexation in place, because that's something that ensures that you are not merely
14:09taxing inflation.
14:10Inflation is, is something that breaks the back of the middle class anyways, and on top
14:16of or every person really.
14:18And on top of that, if it is taxed without any real income or gain being earned by an
14:22investor, then that's something which really adds to the agony of the inflation itself.
14:27So I would feel that's something that is very important to ensure.
14:30And if I look at international investors, they really look at inflation in terms of
14:36maybe US dollars or other currencies, which over a period of time, off late the US dollar
14:42also has seen some inflation, but otherwise over a period of time, the inflation is very
14:47muted in some of these currencies.
14:49So Indian investors typically lose because of the higher rate of inflation in India.
14:53And therefore, that needs to be protected from a tax standpoint.
14:57Is my interpretation correct?
14:58What you're suggesting is that indexation should be available even on equity?
15:04So probably yes.
15:06But the whole thing there is if they are going to live with a 10% tax and without indexation,
15:12which is what the current regime is, I'm not too sure that's what is going to easily happen,
15:16because probably what they are trying to say is, okay, STT plus a 10% long term capital
15:21gains tax is a reasonable tax rate.
15:24We also have to weigh this and counterbalance this with the fact that if a salaried person
15:29is going to pay at normal tax rates, why should long term capital gains tax be so very
15:36beneficially treated.
15:37So really, the 10% rate per plus the STT balances of this point that I just mentioned about
15:43equity in taxation, plus the fact that 10% is justified because there's also inflation
15:48factor.
15:49So I think it just makes life simple to keep it 10%.
15:52And that 1 lakh threshold, do you think they'll tinker with it at all for equity?
15:56I do not think so.
15:57In fact, if at all, I would feel there is a case to increase that threshold because
16:04if 1 lakh was something that was true a few years ago, given the inflation that 1 lakh
16:09obviously is much lower today.
16:11So there is probably a case of increasing that like with all other thresholds.
16:16But even if they don't, I don't think that is going away.
16:18So that 1 lakh threshold is not just to protect the small investor, it is also to protect
16:23you against inflation.
16:24Is that the right?
16:25I would think it's because to a large extent, STT was always meant to be a substitution
16:31against capital gains tax.
16:32So when they brought capital gains tax back into listed securities, what they said is
16:37okay, for the small investor, at least we are honoring that original idea that STT is
16:42a substitution for capital gains tax.
16:44But for larger gains and for larger investors, probably they said we bring a token 10% tax.
16:50That I think was the logic or the rationale.
16:52Okay.
16:53To close this conversation out and to round it out, if we can call it that, you've spoken
16:58about several aspects, but let's tie it all together.
17:01When it comes to the treatment of capital gains and the taxation of capital gains, what
17:07is the ideal scenario for India?
17:10So the way I would look at it is not to tinker too much, continue with a stable tax regime
17:16at the same time, reduce the complexity and make it simple and as rationalized as can
17:23be possible.
17:24I would feel therefore there has to be two or maximum three buckets into which they could
17:29probably divide.
17:30Asset classes?
17:31Asset classes.
17:32One is financial instruments, which are risk bearing if you want three classes.
17:38If you want two, then it's just financial instruments and other assets.
17:41If you want three classes, financial instruments that are risk bearing, other financial investments
17:47and all other investments or assets.
17:49Which is gold and real estate.
17:50Gold, real estate, jewelry, works of art, paintings, whatever else you have.
17:55So all of that can be the third category of other than financial instruments.
17:59And I would feel the most favored treatment obviously has to be investments in financial
18:04instruments which are risk bearing because that's where we need capital in a capital
18:08starved country like ours and domestic investors have now gotten onto it.
18:12So I would feel that has to be the most favored, maybe 15% short term, 10% long term, one year
18:19period of holding for long term, by and large.
18:22The non-risk bearing financial instruments could again be maybe one year or two years
18:28maximum for long term.
18:30This is debt now.
18:31Debt.
18:32Financial instruments which are like debt mutual funds or debt instruments or whatever.
18:36They could be like, you know, one year or maximum two years.
18:41They could be 20% tax, but with indexation benefit and the short term can be at regular
18:46slab rates.
18:48That's how I view the financial instruments, non-risk bearing, broadly speaking, because
18:52both these are productive assets and they need to get a better treatment.
18:55Productive investments need to get a better treatment.
18:58Not that residential houses aren't and we can debate that.
19:01But the third category could be relatively higher tax.
19:06For example, it could be for short term slab rates, for long term, 20% with indexation
19:11and the period of holding could be three years or whatever.
19:14So that's how I would feel.
19:16Keep it very simple.
19:17Maximum three, ideally two categories of assets and productive, non-productive.
19:24Tax it simple.
19:25All right.
19:26Let's hope that the finance minister is listening and let's see what pans out.
19:30Thank you so much for joining me today.
19:32Thank you.
19:32Thank you so much, Alex.
19:34And hopefully this conversation has given you some perspective ahead of the presentation
19:39of the union budget 2024.
19:41And if indeed something is announced, then you got your information here.
19:45Do stay tuned.
19:46Lots more coming up over the course of the day.
19:48And this is NDTV Profit.
20:00you
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