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CBDT spares investors from capital gains disputes
March, 02nd 2016

Ndividual equity investors now have the sole discretionary power to decide if their income from equity is taxable or not, as per a Central Board of Direct Taxes (CBDT) circular.

The move will particularly benefit long-term equity investors, who were under scrutiny and whose capital gains were sometimes treated as business income.

The circular states, “In respect of listed shares and securities held for more than 12 months immediately preceding the date of transfer, if the assessee desires to treat the income arising from the transfer thereof as capital gain, the same shall not be put to dispute by the assessing officer.”

This simply means the individual investor sells her shares after a year, she does not have to worry about litigations and the income is non-disputable. Such cases were often open to ambiguous interpretations. The criteria for such ambiguity were many -- frequency of transactions, source of funding or even the classification of transactions in the financials.

Capital gains arising from sale of shares held for more than a year are exempt from tax.

“This is a positive move for Dalal Street, and the government has taken the right step to encourage long-term investors. Now whether you borrow money and invest or it’s your own capital, as long as you sell after a year, you are out of taxation and legal issues,” says Ambareesh Baliga, CEO, Honeycomb Wealth Advisors.

Girish Vanvari, KPMG head of tax, too feels it is a step towards ironing out legal ambiguity. “This will reduce litigation and will be very good for capital market investors. In the spirit of the circular, this should not enhance scrutiny in cases of investments that are less than 12 months, which may also be capital assets.”

However, once the assessee or investor in this case decides to treat his or her income as capital gains and not as business income, one cannot change the category in the subsequent years.

“Opting for business income gives the advantage of claiming deductions over expenses and in times of falling stock prices, but if one opts for capital gains then you can’t avail these benefits. The trade off is between paying taxes and claiming deductions,” says Sujit Ghosh, partner, Advaita Legal. However, the larger question, he says is whether the circular can be binding on the assessee. “It is an established principle of law that circulars don’t bind the assessee, but only bind the revenue,” he adds.

Moreover, while the spirit of the circular is sound, the implementation is yet to be seen.

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