Changes in India’s tax regime for capital gains

Source: The post changes in India’s tax regime for capital gains has been created, based on the article “Capital gains: Why deny an inflation adjustment?” published in “Live Mints” on 25th July 2024

UPSC Syllabus Topic: GS Paper 3- Economy-mobilisation of resources

Context: The article discusses changes in India’s tax regime for capital gains. It explains that both short- and long-term capital gains tax rates have increased. The removal of indexation benefits for non-financial assets like property is criticized, suggesting it could lead to unfair taxation.

For detailed information on Issues with India’s capital gains tax regime read this article here

What Changes Were Made to India’s Tax Regime?

1. Short-Term Capital Gains Tax: If an investor sells shares within a year, they now pay 20% tax instead of 15%.
2. Long-Term Capital Gains Tax: Selling shares held for more than a year now incurs a 12.5% tax, up from 10%.
3. Removal of Indexation Benefits: For non-financial assets like property, except those acquired before 2001.
4. Tax Rate Uniformity: Aimed to simplify recall of tax rules across different asset classes.
5. Impact on Inflation Adjustment: Ignoring inflation’s compounding effect could lead to higher tax liabilities. Without indexation, a property’s real value increase is not considered, leading to a higher tax bill.

What Are the Arguments for and Against the Changes?

Arguments For:

1. The tax hikes align with progressive taxation, targeting those who can afford to pay more.
2. Asset values have risen significantly, justifying higher taxes.
3. Reducing speculation in real estate could increase housing supply. For example, investors might shift from property to equities, addressing actual housing needs.

Arguments Against:

1. Removal of indexation for properties bought after 2001 is seen as unfair.
2. Indexation helps offset inflation, reflecting the real gain from asset sales. For example, a house bought for ₹1 crore 20 years ago, considering 6.5% average annual inflation, is now worth much less. Without indexation, tax bills become unreasonably high.
3. The policy change contradicts the expectation of stable tax rules.
4. Could lead to increased cash deals and black money usage.
5. Complicated tax avoidance strategies, like reinvesting in a transit house, reflect poorly on the tax system.

What Should be Done?

1. Reintroduce indexation benefits for all non-financial assets, not just for properties bought before 2001.
2. Address the issue of speculative investments in real estate through other measures.
3. Ensure tax policies are stable to maintain trust among investors.
4. Promote evenly applied levies within asset classes to adhere to the cardinal principle of taxation.

Question for practice:

Examine the arguments for and against the recent changes in India’s tax regime for capital gains, including the impact of removing indexation benefits for non-financial assets.