As stock prices continued to take a beating, the government on Monday gave detailed reasons for taxing long-term capital gains (LTCG) made out of selling shares, saying exempting such income from tax was inherently biased against manufacturing and encouraged diversion of investment to financial assets.
In Frequently Asked Questions (FAQs), it said the Budget for 2018-19 provides for taxing Rs1 lakh and above of LTCG arising from sale of shares held for over one year at a concessional rate of 10%. Prior to this, long-term capital gains arising from transfer of long term capital assets, being equity shares of a company or a unit of equity oriented fund or a unit of business trust, was exempt from income-tax under clause (38) of section 10 of the Act.
However, transactions in such long-term capital assets are liable to securities transaction tax (STT).
“This regime is inherently biased against manufacturing and has encouraged diversion of investment to financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these exemptions,” the FAQs stated.
The exemption has now been withdrawn to minimise economic distortions and curb erosion of tax base, it added.