The government is likely to maintain the distinction between short term and long-term capital gains to encourage long-term savings, as it deliberates the draft direct taxes code.
The finance minister said in his Budget speech that the new direct taxes law could be rolled out from April 1, 2011. The government is veering around to the view that the existing regime with regard to taxation of capital gains should be continued, a finance ministry official privy told.
Long-term capital gains are taxed at concessional rates while short-term gains are taxed at the marginal rate of the tax payer and could be as high 30% for those in the highest slab. The tax treatment of shares is different from other assets. Currently, any stock market asset held for more 12 months is considered long-term capital assets but for all other assets have to be held for more than 36 months to be considered a long-term asset.
Moreover, shares held for the long-term attract only the securities transactions tax while others assets are levied a long-term capital gains tax of 10%.
The draft direct taxes code has proposed to tax capital assets irrespective of the period of holding. The entire capital gains of the assessee is proposed to be added to his income and taxed at the marginal rate.
The Central Board of Direct Taxes, the apex direct taxes body, that examined the code threadbare has also favoured continuing with the current framework with regard to capital gains tax.
Finance Minister Pranab Mukherjee has asked the CBDT to rework the draft code based on the feedback received from stakeholders before it is introduced in the Monsoon session.
There is surely an advantage to have different tax rates for long-term and or short, but that may not be the sole factor for an investor while undertaking a commercial transaction. Different factors including market conditions, requirement of funds, future expected realisations may have an over-arching impact on financial decision, said Vikas Vasal, executive director, KPMG.
However, in case of stock market transactions, concessional rate of tax has been in place for some time now and long-term gains could be completely tax free except for small amount on STT.
Even industry chambers have advocated continuing the existing regime for taxation of capital gains.
We will introduce the legislation sometime in the monsoon session. We have had discussions with all stakeholders and based on it I want to prepare a draft and place it for public comments once again before I introduce it, Mr Mukherjee had told.