Budget 2023: Why focus on capital gains tax should be a priority

The Union Budget for Financial Year 2023-24 will be announced on 1st February 2023. It is expected that the government would announce changes in capital gain tax. To strengthen the housing sector, the restriction of investment in one residential house property under section 54 of the Income-tax Act should be relaxed to increase it to more than one house property. 

Also, the time limit and the restriction on the asset class under Section 54EC for investment in specified bonds up to the due date of filing the Income Tax Return (ITR) should be enhanced. This will help the government to raise more funds at a lower cost and can prove to be a great impetus to the infrastructure sector. Currently, the taxpayers who transfer assets other than land and building are not eligible for claiming exemption u/s 54EC. 

Additionally, an area that needs to be addressed is the case of a joint development agreement as most new constructions today take place where the developer/builder acquires a property or development rights in a property and consideration is to be discharged fully or partly by giving the landowner a constructed area in the developed property.  This poses a big challenge for the landowner to discharge the capital gain tax liability when he/she has not received the consideration in form of constructed area in the developed property. Hence, to address this issue of discharging the tax liability, changes should be made so that capital gains may be computed in the year in which this transfer takes place and the capital gains which relates to the amount to be received in the future in lieu of the constructed area should be taxable in the year in which such constructed area is received by the landowner. 

Furthermore, an area which also needs consideration is the limit of the total turnover and the total assets at the time of conversion of company into LLP. Conversion of a private company into LLP is not treated as a transfer and, hence, no capital gains get attracted in this case. However, there are certain conditions prescribed to be complied with for being excluded from the definition of ‘transfer’. One of the conditions is that the total sales, turnover or gross receipts in the business of the company in any of the 3 preceding years should not exceed Rs 60 lakh. Also, there is another condition wherein the total assets during the previous 3 years should not exceed Rs 5 crore. This creates a hindrance in the ease of doing business in India. 

Moreover, the surcharge on long-term and short-term capital gain on listed equity shares is capped at 15 per cent, although short-term capital gains on unlisted shares are still subject to the surcharge based on the total income. A capping on surcharge for all kinds of short-term and long-term capital gain should be introduced. 

Another expectation could be simplification in the holding period because all the capital assets have different holding periods and different tax rates at present. For example, an immovable property would be treated as a long-term capital asset if held for more than 2 years whereas listed shares are treated as long-term capital asset if held for more than a year. Also, there is an exemption limit of Rs 1 lakh allowed for long-term capital gains which should be re-looked at from the point of view of increasing it to consider aspects such as inflation and to encourage more investors into investing in the equity stock markets. 

Views are personal. The author is Head of Tax Market, AKM Global