Union Budget 2021-22 Expectations: While the Indian economy seems to be obtaining back on track and capital markets which are noticed to be the barometers of the economy look to show all-time higher positive sentiments amongst the institutional and retail investors, particular tax challenges will need quick resolution. One hopes the government addresses these in the spending Budget proposal.
1. Tax collection at sources (TCS) on sale of unlisted equity shares
The Finance Act 2020 expanded the scope of TCS by introducing the provision for TCS of .1% on the sale of goods worth Rs 50 lacs or more, with impact from 1 October 2020. The term ‘goods’ is not defined below the provisions of the Income-tax Act and thus, an challenge arises on the applicability of TCS to securities. Though ‘goods’ contain securities below particular laws, probably the intention was not to cover economic instruments. CBDT had issued a circular clarifying that TCS would not be applicable on the transaction in securities carried out by means of stock exchanges. This correctly suggests that TCS applies on sale of unlisted securities which is accomplished outdoors the stock exchanges, such as unlisted equity shares, units of mutual fund, and units of AIF.
It’s a frequent understanding that there is an active industry for these securities not only amongst institutional investors like PE/AIFs and promoters of businesses (for pre-IPO allotments, buybacks, and so forth) but also retail investors and personnel who get shares by means of ESOPs. TCS would imply the purchaser pays .1% tax even when there is no certainty about timing and potential to sell and irrespective of whether there will be any profit at all. TCS is alright in regular trade of fantastic since fantastic are purchased for sale in the brief term but not exactly where securities are illiquid and meant for lengthy term investments.
2. Lower withholding tax prices on dividend revenue for FPIs
As per the present provisions, businesses withhold tax at the price of 20% plus surcharge and cess on the dividend paid to FPIs, even if they invest from a jurisdiction that gives for a reduced price of 5%, 10%, 15% primarily based on India’s double tax avoidance agreement with that nation. This is since the withholding provisions for FPIs is as per Section 196D of the Act, whereas the reduced prices are applicable for payments to non-residents below Section 195. Since section 196D is distinct for FPIs, advantage of reduced prices is not applicable for FPIs. It is critical to address this anomaly by amending Section 196D of the Act to provide for withholding of taxes on dividends to FPIs at the applicable ‘rates in force’ as an alternative of 20%.
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3. Parity in tax therapy for investments in Unit-linked investment plans (ULIP) of life insurance coverage businesses and mutual fund units
Under the present tax regime, ‘switching’ of investment in units from 1 scheme to a further scheme of a mutual fund such as Dividend to Growth or Direct to Regular is regarded as a ‘Transfer’ and is liable to capital gains tax, even although the quantity invested remains in the exact same portfolio and there is no realized get. However, the therapy is not exact same for ULIP and accordingly not subjected to any tax. Also, capital gains on proceeds received from ULIP continue to stay exempt in comparison to capital gains on mutual fund units which is topic to LTCG/STCG. To provide a level playing field amongst comparable investments, capital gains exemption must be granted on such switches in mutual fund units.
4. Streamlining of capital gains tax and period of holding amongst distinctive securities
Currently, there are distinctive prices of capital gains taxation i.e., 10% and 20% for LTCG and 15% and 30% for STCG based on the variety of safety held such as equity, debt, units, and so forth. and irrespective of whether listed or not. Further, the lengthy-term period is 1 year, 2 years or 3 years for distinctive sorts of securities. This leads to a lot of complexities for investors when figuring out their capital gains tax and adjustment of earnings and losses. There is scope for simplification of categories of distinctive securities.
5. Rebate on Securities Transaction Tax (STT)
India is the only nation that levies STT and CTT in the derivatives and commodities segment respectively. STT is applied on each sides (purchase/sell) in the case of money equity and only on the sell-side in the case of derivatives. Initially, the quantity of STT paid was permitted to be claimed as a tax rebate but this rebate was later discontinued. Its been a lengthy pending demand of the investor neighborhood that either STT which was initially meant to be in lieu of capital gains must either be absolutely removed, or a rebate is reintroduced.
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6. Pass-by means of status to Category III AIFs
Currently, there are no distinct provisions governing taxability of Category III AIFs. Typically, these are structured as trusts and the laws governing taxability of trusts are utilized for figuring out taxability of Category-III AIFs and their investors. However, category I and category II AIFs are granted particular pass-by means of status and are taxable in the hands of the investors. With enhance in surcharge prices for higher-net-worth folks, taxation at the fund level for category III AIFs would lead to a disparity of net tax prices. At the Fund level, surcharge at the highest price would be applicable which would adversely influence the investors falling in the reduced tax bracket but nevertheless be topic to surcharge of 37%. A ‘pass-through’ status will make sure fairness in the tax therapy for all investors.