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More capital market-friendly measures awaited in Budget — Tax experts want full exemption on LTCG

Mohan Padmanabhan

Kolkata , June 1

EVEN as the Union Finance Minister, Mr P. Chidambaram, is gearing up to start pre-Budget discussions with various experts, including the Securities and Exchange Board of India officials, especially on the direct taxes front, tax experts and investor groups are expecting more capital market-friendly measures in the forthcoming Union Budget.

However, the big question asked by everyone is what happened to all the promises made in the interim Budget on February 3, 2004 by the outgoing Finance Minister, Mr Jaswant Singh, and whether Mr Chidambaram will push for some of these market-friendly measures. Many say there will be some measures to pep up the capital market, which has witnessed wild swings in the last two weeks.

Mr Singh, while not proposing any changes as such in the Income-Tax Act with regard to direct taxes, had clearly stated that the "regime of listed securities acquired on or after March 1, 2003, being exempt from long-term capital gains (LTCG) should be extended for a further period of three years, so as to provide stability".

Mr Narayan Jain, noted tax lawyer and visiting faculty at the West Bengal National University of Juridical Sciences, told Business Line that the Kelkar committee had recommended full exemption of LTCG in case of transfer of listed equity share.

He said Mr Jaswant Singh had introduced tax exemption of LTCG only in respect of shares comprising the BSE 500 as on March 1, 2003, and equity shares allotted through a public issue on or after March 1, and thereafter. In other words, the benefit applies only to shares acquired between March 1, 2003 and February 29, 2004. Mr Jain said Mr Chidambaram should consider not only extending the benefit of Section 10(36) of I-T Act for the committed period of three years, but may also keep it open-ended in view of the Kelkar panel recommendations.

He suggested that all unnecessary strings attached to this exemption should go. Such LTCG exemption, according to him, was desirable, because a substantial portion of it on equity represented the value of retained earnings, as clearly stated by Kelkar panel. Since the profits of the company would bear the full burden of tax, the retained earnings too would have suffered full taxation.

According to Mr Pallav Gupta, General Manager, Taxation, ITC Ltd, LTCG may even be scrapped altogether, as an investor friendly measure. He felt the Finance Minister might do some number crunching, tinker with rates here and there, for tax relief to flow to large sections, or even do something dramatic like in his 1997 dream Budget. He, however, said, it would take a lot of effort on the part of Mr Chidambaram to offset the ill effects of CMP pronouncements on the PSU disinvestment front. He, however, did not expect any phase-out of the MAT (minimum alternate tax). The Finance Minister also does not have much time in his hands for a well-rounded full Budget. The task force on direct taxes has observed that capital gains on equity could be related to a systemic shift in stock market prices, which may not in any way be related to the economic income of the company, and that such short-term gains would not have suffered taxation at the corporate level.

It has, therefore, recommended that while short-term capital gains on equity should continue to be taxed, LTCG on equity should be eliminated.

However, recognising the possibility of abuse by transferring real assets through the corporate vehicle, the panel has recommended that the LTCG exemption on equity should be restricted to listed securities as defined in Section 112 of the I-T Act. Some tax experts have said that the Finance Minister may take a careful look at measures such as realigning the I-T exemption limits, raising standard deduction for the salaried class, extending tax holiday for power projects beyond 2006 and easing norms for tax treatment of family pension of war widows.

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