Analysis, Income Tax

Curious Case of Long-term Capital Gains tax exemption

In the Finance Act of 2004, the then finance minister introduced the Securities Transaction Tax (STT) on sale of equity shares and simultaneously provided an exemption, under Section 10(38) of the Act from payment of Long-term Capital Gains tax (LTCG) if STT was paid on the sale transaction.

How Securities Transaction Tax helps you save on Long Term Capital Gain Tax

The current finance minister has made a few modifications to this: Now, to claim LTCG exemption under S. 10(38), the STT is payable not only on the sale but also on purchase of shares (barring a few exceptions) and LTCG exemption is restricted to a capital gain of 1 Lakh INR. All gains above 1 Lakh INR will be taxed.

Why was this done?

We thought of putting on our data detective hats and driving through our database to see if we can come up with an answer and here’s what we found.

Income Tax Appellate Tribunal (ITAT) of Mumbai, which accounts for roughly 20% of income tax disputes in India, has over 330 cases on Section 10 (38). Here’s some data surrounding it.

Screen Shot 2018-02-12 at 2.42.01 PM

The data above shows cases filed under section 10(38) from ITAT Mumbai. Of the 330 odd cases, we identified 21 cases where the Revenue alleged use of penny stocks by assesse to channel unaccounted money and claim exemption under Section 10(38). However, the Revenue was successful in proving this in only 2 cases. The transaction value of most of these cases was 50 lakhs INR or more and most of these cases were ruled in favour of the assessee.

Through our study, we also derived that it may be a big challenge for the Revenue to identify transactions undertaken to evade tax. Of the 21 cases, we found that 9 cases were initiated under Section 147 of the IT Act where Assessing Officers are given the power to reassess the income if they have reasons to believe that income chargeable to tax has escaped in the original assessment, and 3 cases were initiated after a search was carried out under Section 132 of the Act.

The most concerning issue is that majority of cases we found pertain to assessment year 2005-06 and 2006-07. We don’t have a good answer to the question as to why there weren’t similar cases in later years. It raises a question on the ability of our system to identify the loopholes early and act upon it quickly.

Also read: Capital gains exemption for investment in residential house: Top 5 Issues & their answers

In summary

By mandating STT at both ends, there is a good chance of monitoring these transactions better. This move could deter sham transactions and possibly empower the revenue department to get stricter with those who indulge in them.

But it could also be a cause of lot of dismay, as now one can’t escape the LTCG tax.

(Written by Anuj Sharma, Product Counsel)

2 thoughts on “Curious Case of Long-term Capital Gains tax exemption

Share your thoughts using the comment section below

%d bloggers like this: