MANAGERIAL ECONOMICS

Assignment No: 1

Name: Sharada Raut

PRN : 09020446006
News Title: FOR SENSIBLE CAPTIAL GAINS TAXATION 19/08/2009

Capital Gain Tax: As per Indian Income Tax laws, a capital gain tax is a
voluntary tax payable on the sale of assets, investments, capital accumulation, and
productivity.

A Capital Gain can be defined as an any income generated by selling a capital

investment. A capital investment can be anything from business stocks, paintings,
and houses to family businesses and farmhouses. The 'gain' here, refers essentially
to the difference between the price originally paid for the investment and money
received upon selling it. A capital gain can be categorized under the following
heads, depending on how long the investment has been under your possession:

Short-term: If you sell an investment within three years from the date of its
purchase, it will be defined as a short-term capital gain. But if the investment is in
the form of mutual funds/company shares, the allowed time duration is one year.

Long-term: If you sell an investment after three years from the date of its
purchase, it will be defined as a long-term capital gain. However, selling mutual
funds and company shares after one year will also constitute a long-term capital
gain.

In case of a short-term capital gain related to sale of property, the gained amount
needs to be added to your total annual income. Then you'll be needed to pay capital
gain tax, depending on the total taxable amount.

In case of a long-term capital gain related to sale of property, factors such as

inflation are usually taken into consideration. The seller of the property needs to
pay a tax not just on the real capital gain, but also on the projected gain as a result
of inflation.

You need to pay a capital gain tax on all your capital gains, though the government
will allow you only a partial tax deduction in case you suffer a loss as a result of
selling your investment.
Capital gain tax rates

For short-term capital gains, you will be taxed depending on the tax slab relevant
to you after you have added the capital gain to your annual income. But if the
transaction was levied with Securities Transaction Tax (STT), your gain will be
taxed 10%. For long term capital gains, you will be taxed 20%. But if the
transaction was levied with STT, you need not pay any tax on your gain. In case of
long term capital gains, you can either calculate your capital gain using an indexed
acquisition cost, or you can choose not to opt for indexing.

STT (Securities Transaction Tax)

Securities Transaction Tax (STT) is a tax being levied on all transactions done on
the stock exchanges. Securities Transaction Tax is applicable on purchase or sale
of equity shares, derivatives, equity oriented funds and equity oriented Mutual
Funds

Securities Transaction Tax (STT) was introduced in India a few years ago, to
circumvent the tax avoidance of capital gains tax.

The government can only tax those profits, which have been declared by people. A
lot of people simply didn’t declare their profits and avoided paying any capital
gains tax.

To circumvent this situation, the Finance Minister at that time Mr. P Chidambaram
introduced the Securities Transaction Tax. This tax is payable whether you buy or
sell a share and gets added to the price during the transaction itself.

Since brokers have to automatically add this tax to the transaction price, there is no
way to avoid it. If you place a limit order, then the broker will automatically adjust
their brokerage and the Securities Transaction Tax and give you a price that
matches your price. So, in a lot of cases; you will not even notice the tax that you
paid.
Double-Taxation Treaty

Double taxation occurs when an individual is required to pay two or more taxes for
the same income, asset, or financial transaction in different countries. Double
taxation occurs mainly due to overlapping tax laws and regulations of the countries
where an individual operates his business. When an Indian businessman makes a
profit or some other type of taxable gain in another country, he may be in a
situation where he will be required to pay a tax on that income in India, as well as
in the country in which the income was made! To protect Indian tax payers from
this unfair practice, the Indian government has entered into tax treaties, known as
Double Taxation Avoidance Agreement (DTAA) with 65 countries, including
U.S.A, Canada, U.K, Japan, Germany, Australia, Singapore, U.A.E, and
Switzerland. DTAA ensures that India's trade and services with other countries, as
well the movement of capital are not adversely affected.

In this budget, income-tax changes have happened. Those proposed tax changes
will ease out the life of middle class person, but in turn it is going to lead into large
revenue loss.

Though experts have analyzed most proposed changes, Capital gain tax is area is
affected or wrong.

The proposed capital gains tax will exempt people who never sell any assets, and
penalise those who do. The proposed tax will be levied only on gains from sales,
not on gains in the value of unsold assets.

The proposed code will tax this good practice of selling some assets and buying
other assets and exempt the bad alternative. At the same time portfolio reshuffling
is taxed in this new tax. Hence to avoid this tax portfolio reshuffling will be
discouraged. Normally this portfolio reshuffling should be encouraged.

Portfolio reshuffling means selling some assets and buying others (For eg.your
investment may be will in be different forms (shares, bonds, real estate). To gain
the profit person may be changing the amount invested in it. A person has invested
in agriculture land and also invested in IT share market. Due to this recession
period, he wants to sell his IT shares and invest in healthcare market. This should
be encouraged, it should not be taxed. If that person only sells IT share and doesn’t
invest in other asset, in that case capital gain tax should be charged to him.

Tax proposal should govern efficiency, equity and simplicity.

Horizontal Equity is the theory stating that people in the same income bracket
should be taxed at the same rate. Horizontal equity implies that we give the same
treatment to people in an identical situation. E.g. if 2 people earn 5 lakhs they
should both pay the same amount of income tax. Therefore, horizontal equity
makes sure we don’t have discrimination on the grounds such as race / gender /
different types of work.

Vertical equity is a method of collecting income tax in which the taxes paid
increase with the amount of earned income. The driving principle behind vertical
equity is the notion that those who are more able to pay taxes should contribute
more than those who are not.In this case person earning 24lakh per annum would
be paying more tax than the person earning 5lakh per annum.

Even though tax administration has comparatively improved, many capital gain tax
transactions are not recorded officially to avoid the tax payment to government.

Agricultural land is exempted from capital gains tax, it's a huge legal loophole
exploited by probable tax payers.

Hence taxing capital gains, which looks theoretically good can be bad in real time
practice as it taxes honest person while leaving out very rich person who should
actually pay the tax.

Foreign portfolio investors are investing in Indian stock market through tax havens
and they are escaping from capital gain tax. Foreign investors have to pay capital
gains tax, but they escape if they route investments through zero-tax countries with
whom India has an avoidance-of-double-taxation treaty.
More no of people should pay tax to increase the government revenue from tax.
For this only former finance minister Chidambaram abolished long-term capital
gains tax on shares transacted on stock exchanges, and instead levied a securities
transactions tax (STT).

STT has a huge advantage over capital gains tax in simplicity of

administration.STT is collected automatically from all stock markets, and is a rare
tax that is not evaded at all. Stock market turnover has risen sharply after the
imposition of STT, suggesting that its adverse effects on transaction volume have
been limited.

If one views from the three criteria of efficiency, equity and simplicity, to generate
more revenue, the proposed tax code needs a different approach to capital gains
tax. The STT should continue as it cannot be avoided by tax payer which in turn
will increase tax revenue. To check income-tax evasion, it could be combined with
a low, flat tax on capital gains — say at 12.5%, half the corporate tax rate. Most
important of all, portfolio reshuffling (selling some assets and buying other assets)
should be fully exempted from capital gains tax. Flat capital gains tax will also be
simple to administer.