No more exemption for capital gains from listed equity shares in India

At the 2018 Union budget of India earlier this month, Finance Minister Arun Jaitley proposed a change to the current capital gains tax system by bringing back long term capital gains tax.

Beginning 1 April 2018, India will tax capital gains for equity investments held for more than a year, reimposing a tax scrapped in 2004. India already taxes equity investments held for less than a year at 15 percent and has a securities transaction tax that can range from about 0.01 percent to 0.25 percent depending on the type of security. It is pertinent to note that most other Asian countries do not impose long term capital gains tax for non-residents.

Currently, long term capital gains arising from transfer of listed equity shares or units of equity oriented fund or units of business trusts are exempt from income tax under Section 10(38) of the Income-Tax Act, 1961 (Act). With the aim to minimise economic distortions and curb erosion of tax base, it was proposed to withdraw this exemption and to introduce a new section 112A in the Act. Long term capital gains arising from transfer of an equity share, or a unit of an equity oriented fund or a unit of a business trust shall be taxed at 10 percent of such capital gains, levied in excess of Rs 1 lakh. Although the tax rate was kept at 10 percent, it shall be charged on the capital gains as computed without giving the benefit of indexation to the investor. 

Some market participants believe that foreign investors will be tempted to route investments through countries with favourable tax treaties with India, or through offshore derivative structures which track Indian equities, but that comes with its own set of problems and at an increased cost.