The Time Press

Rationalise capital gains tax regime

Revenue Secretary Tarun Bajaj is right to say that the capital gains tax regime needs a fresh look. Capital gains are taxed inefficiently now. A simple way to entail a holistic way to tax capital gains is to scrap the clumsy distinction between short- and long-term capital gains – which attract different rates – based on the period of holding, abolish the securities transaction tax (STT), and include only that portion of capital gains not used in any other capital asset, as part of taxable income. This would mean sparing the saving asset from tax and charging a tax only on the income from the asset. So, tax would be charged only when assets are sold and converted into income used for consumption.

This roll-over principle, reiterated in the original Direct Taxes Code (DTC), has already been accepted in housing. A person who sells a house and invests the proceeds in a new house is exempt from capital gains tax. Ditto for a person who sells land or jewellery and invests the proceeds in a house (of course, the rules are more restrictive in such cases). The same principle can be extended to all other asset churning, particularly financial assets. This means there would be no tax on gains from the sale of a house if the money is invested, say, in shares.

Today, if an individual churns her portfolio, she is taxed every time she sells. Effectively, capital gains tax is a levy on churning that should not be discouraged. Extending the roll-over facility to all assets will encourage churning across assets and make the tax treatment more efficient. It would incentivise savings and bring about some kind of convergence between income-tax and the goods and services tax (read: consumption tax). The government should start consultations with industry.

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