The Finance Ministry, along with the Prime Minister’s Office (PMO) is considering measures to revamp taxation of capital market transactions. The measures include withdrawal of Dividend Distribution Tax (DDT), review of holding period for long-term capital gains, short-term capital gains and Securities Transaction Tax (STT).
The government imposed a long-term capital gains tax on equities from FY 2018-19. Equity gains above Rs 1 lakh are taxable at 10% without indexation. The tax is leviable on the sale of equities held for more than one year. The Finance Ministry is considering a review of the period for long-term equity investments.
Short-term gains on the sale of equity investments held for up to one year are taxable at 15%. The equity investments include equity shares, equity-oriented mutual funds and Exchange Traded Funds (ETF).
STT is leviable on the purchase and sale price of securities. STT collections are in addition to the capital gains tax on the sale of equities.
STT was introduced in 2004 in the place of an exemption for equity gains. STT is a turnover based tax and is levied on the equity market transactions too. STT generates revenue as well as helps the government track the securities market transactions. Presently, an investor pays both STT as well as capital gains tax.
In the recent Budget presented on 5 July 2019, an additional dividend distribution tax of 20% was levied on the buyback of shares by listed companies. The tax was imposed to discourage companies from using share buyback route instead of distributing dividends.
Also, there was no relief for the taxation of capital market transactions. However, the income arising to the shareholder upon buyback of shares is exempt under section 10(34A).
Hence, the Finance Ministry is considering proposals for revamping the taxation as a booster to the capital markets.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.