Dinesh Kanabar, CEO of Dhruva Advisors; Kalpesh Maroo of KPMG India and Pranav Sayta of EY India discussed potential changes to personal income tax and capital gains tax in the upcoming budget with CNBC-TV18.
As Budget 2024 nears, the buzz around tax changes grows louder. Once again, Indians are waiting with bated breath for potential changes to personal income taxes and the tax on equities.
In an interview with CNBC-TV18, Dinesh Kanabar, CEO of Dhruva Advisors; Kalpesh Maroo of KPMG India and Pranav Sayta of EY India discussed their expectations on tax changes on equities in the Budget to be presented on July 23.
Kanabar believes there is a need for rationalisation of capital gains taxes, but he is not sure if it will happen this year.
The government should also increase the basic income tax exemption limit in line with the rise in inflation, he noted.
These are verbatim excerpts of the interview.
Q: The hopes are running a little higher this time around given that the elections are behind us, but on capital gains, what should we brace ourselves for?
Kanabar: Indeed, the entire capital gains tax regime tends to be very cumbersome. We have short-term, long-term, unlisted security, residential houses, holding period, resident, non-resident and we all know that and sometimes I wonder as to whether you are asking for rationalisation, are you careful about what you wish for? So, for example, many years ago, we were all talking about dividend distribution tax being paid by the company and being substituted by a dividend tax and then that happened, people started to complain that high-net-worth individuals are now paying far more than what they were paying. So, when you start talking rationalisation, the questions which you put up, which are the usual questions, when we see one year ago up, we see the rates go up, and I am no expert. I do not understand markets, I understand taxes. Is there a need for rationalisation? Yes. Is there a more important need for stability? I would say yes.
I think both as a part of the Federation of Indian Chambers of Commerce and Industry (FICCI) and the conversations that I have had with the government, I need to say that the need to communicate to the world that India has a stable tax regime and that is not going to be tinkered year on year.
On your earlier point as to whether the threshold limits for exemption should go up. Probably yes, because there is inflation and maybe there needs to be an automatic application of an index to take care of the inflation. But so far as capital gains tax is concerned, if you go back and talk about rationalisation and making it simple, maybe there is a need, but I would say that there is an even greater need to communicate stability, which is very important.
What has happened is that we have seen a huge number of initial public offerings (IPOs) in the last year and that is very welcome for the industry, it shows foreign investments coming in, it shows domestic investments coming in and the last thing that the government should do or would want to do is to rock that boat which has settled down and is going very well. So, from my part rationalisation is very welcome. Is this the year? Maybe not?
Q: Capital gains rationalisation, we all talk about it, we all say we wanted it. The question is what the right model could be, and the specifics. So, let’s talk listed. Listed equity, the rate is 10% for the long term, but the definitions are different, it is only one year. If it’s unlisted, then it’s two years, if it’s property then the definition is two years, and the rates also vary. So, if at all, you were to recommend to the government a formula to start simplifying and rationalising this, where would one begin? What are the rates that you would move around?
Sayta: There are so many different provisions right now that if even a person like me were to be asked a question on capital gains, I would have to go back to the book before being sure what kind of rates, period of holding and so on would apply. So, it does call for some rationalisation for sure. At the same time without compromising very correctly, as has been pointed out, the stability, and predictability, which have been the hallmark of this government, not trying to do minimal tinkering of the laws all the time, that is been the hallmark and that should continue. But I would feel two or three things can be done very simply. One could bracket assets maybe into three categories. One is risk-bearing financial assets, the other is other financial assets and the third is all the other assets whatsoever. Just have these three baskets. When I say risk-bearing financial assets, I would normally put within it shares, equity-oriented mutual funds, and maybe real estate investment trusts (REITs), infrastructure investment trust (InvIT) units. So, those are the three types of risk-bearing financial assets, all other financial assets, I would put separately, and the third bucket would be other than financial assets, which would mostly be in the nature of gold, silver jewellery, immobile properties and so on in the entire rest of the bucket. I would feel the tax rates can be rationalised as, for the long-term, 10% on the risk-bearing financial assets, 20% inclusive of the benefit of indexation for the other financial assets as well as 20% for the other third bucket. So, the second and third buckets might be similar rates of taxation with indexation benefits. So far as the period of holding is concerned, it could be rationalised as 12 months or meaning one year for the financial assets in total, whether it is risk-bearing or otherwise. And for all other assets, it could be, for example, 36 months, which I think would keep it very simple. The short-term capital gains tax rates could be 15%, for the risk-bearing financial assets, and maybe the normal slab rates, or whatever the regular rates of income tax might be for all the other categories of assets that I think would be very simple, but at the same time, address the need of stability, predictability, and fairness and transparency for all.
Q: You just heard Sayta’s model? Would you concur or if you would like to sort of add or delete or tinker around? What would your model be, capital gains?
Maroo: More or less, I would concur with maybe one tweak, we need less complexity than more. So, I would just keep it as two buckets- financial assets, risk-bearing assets, everything, which is securities at 12 months 10% rate and every other asset at 20% with indexation benefit and three years. Most importantly, I would emphasise what Kanabar talked about – stability is the key. In the search for simplicity, I would urge and request the government to not find a midpart and increase the rate, let’s say from 10 to 15, which goes against the stability that we have been working. So, simplicity is needed but do it in a manner that does not upset the current system. So, 10 going up, and there have been some murmurs about it. I would strongly hope that that does not happen.
Q: The government has been trying to move people to the new tax regime. They threw in a standard deduction of ₹50,000, but yet we have not seen that shift away from the old regime to the new regime. Do you think in this budget, we could see more by way of deductions, or any sort of exemptions for the new tax regime to make it more lucrative to enable that shift of people who are on the old tax regime, should they be expecting anything?
Kanabar: If you go back, historically, to the new tax regime for corporates, it took maybe about 3-4 years. But today, if I may dare say almost 80-90% of the corporations are on the new tax regime, and rightly so because the last thing you want is to talk about deductions, exemptions, and litigation surrounding those deductions and exemptions.
The new tax regime for individuals has just been a year old, and it takes some time for any regime to settle down, I would very much encourage people to move more and more towards the new tax regime. There is, of course, this whole fashionable ask that we need more exemptions and more deductions. I would rather have a far lower rate of tax and the government using tax to promote any of the policies that they need to do otherwise. So, as we saw, for example, again, giving a corporate perspective that instead of having tax deductions and exemptions, you had a PLI, which you put money in people’s hands.
Similarly, for individuals, we need to move towards a simple rational regime. I mentioned earlier on, and I might like to sort of reemphasise that, there is a need to reset the threshold limit every year, we have inflation. In fact, for capital gains tax, for example, we have the cost of acquisition index, the same thing we need to ensure that we keep on moving the index of exemption up all the time, and the government could do everything to promote the new tax regime and to increase the threshold limit. Remember that when the government increases the threshold limit, and I have done some work and shared it with CNBC, a ₹1 lakh increase in the threshold limit means that the government loses tax revenue by about ₹137,000 crore.
We are looking at a point in time when the government’s revenues are at a record whether it is in terms of goods and service tax (GST), whether it is in terms of direct tax; a ₹137,000 crore reduction in taxes does not mean that because a lot of that money goes to people who are going to use it for consumption, and when they use it for consumption, you are giving a fillip to the fast-moving consumer goods (FMCG) sector, you are increasing your GST collection. So, I would be very much in favour of the government doing everything and more and a) to increase the threshold limit and b) to make it more attractive for people to move to the new tax regime where we do not talk of deductions and exemptions; and moving all the way also, not just the basic threshold, but take the limit all the way up for the new regime.
Source: https://www.cnbctv18.com/economy/budget-2024-tax-experts-income-tax-cuts-exemption-increase-capital-gains-taxes-new-tax-regime-19441900.htm
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