Budget

Published: Jan 8, 2023
Updated: Jan 8, 2023

Capital Gains Tax Reforms on the Horizon in Union Budget 2023: What to Expect

Structure too complex , needs reforms

As the Indian economy continues to grow and evolve, the government is facing increasing pressure to modernise and streamline its tax systems. One area that has received particular attention is the capital gains tax, which is levied on the profits earned from the sale of capital assets. In the upcoming Union Budget for 2023-24, many are calling on the government to consider reforms to the capital gains tax system, including rationalising surcharges and extending tax exemptions for certain sectors. In this article, we will explore the current state of the capital gains tax in India and what changes may be on the horizon as the government looks to create a more efficient and equitable system for all taxpayers.

Meaning of Corporate Gains Tax and the Current Rates

Capital gains tax is a tax on the profit that an individual or business realises when they sell a capital asset for a price that is higher than the cost of purchasing the asset. Capital assets include stocks, bonds, real estate, and personal property. In India, the capital gains tax rates are determined by the holding period of the asset, with different rates applying to long-term capital gains (LTCG) and short-term capital gains (STCG).

Under section 112 of the Income Tax Act, LTCG on the sale of listed securities, such as stocks and bonds, are taxed at a rate of 10 percent, while STCG is taxed at the individual's applicable income tax rate. For unlisted securities, LTCG is taxed at 20 percent under section 112A. These rates can be further increased by surcharges, which are additional taxes levied on top of the base rate.

Demands for rationalisation of taxes

The industry body has called for the rationalisation of these surcharges in order to create a level playing field for both listed and unlisted stocks. They have also suggested extending tax exemptions for sunrise and essential categories, which could encourage investment in these sectors.

In the upcoming Union Budget for 2023-24, the finance minister, Nirmala Sitharaman, is expected to address these concerns and consider reforms to the capital gains tax system. One possibility is the simplification of the structure, which could make it easier for individuals and businesses to understand and comply with their capital gains tax obligations.

Expectations of Investors on a Simplified Structure

A simpler and more transparent capital gains tax system could also lead to improved revenue for the government, as it may reduce evasion. By providing clear guidelines and making it easier for taxpayers to understand their obligations, the government can encourage compliance and increase the amount of tax paid.

Eyes on Budget 2023

Overall, the industry body's recommendations for reform of the capital gains tax system are welcome and necessary in order to create a more equitable and efficient system. The finance minister has the opportunity to address these issues and make the process of calculating and paying capital gains tax easier for all taxpayers. This would not only benefit individuals and businesses, but also the government, as it would increase revenue and encourage compliance.