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The Finance minister Arun Jaitley has introduced the move to impose long term capital gains tax of upto 10% on profits made from the sale of equity holdings after April 1, 2018 in the new budget. The budget also proposed that while the tax will kick in from sales made after April 1st, the cost of acquisition used for the calculation of the capital gains tax will either be the actual purchase price or the maximum traded price on January 31, whichever is higher. There will be no long term capital gains tax on gains accrued till January 31.
Bent on increasing the share of manufacturing in the Indian economy, the finance ministry argued that the non-imposition of any kind of tax on the long term capital gains weaned from the sale of shares is prejudicial to the interests of the manufacturing sector and diverts the investment from the sector to financial assets. The government through FAQs (frequently asked questions) also explained that the sales made between February 1st and March 31st will be exempt under the clause (38) of the section 10 of the act. At present, India only imposes a short term capital gains tax on profits made from sale of shares within a year of purchase. The transactions in long term capital assets is only subject to securities transaction tax now.
In response to the arguments that the tax will worsen the situation by enhancing equity sell-off, the Finance secretary Hasmukh Adhia said that it is the weak global sentiment that is the cause of sale of private equity in India and not the long term capital gains tax.
The levy would apply to equity shares of a listed company, unit of an equity oriented fund and unit of a business trust which should have been held for a minimum of 12 months before they become eligible. The FAQ further pointed out that the if the cost of acquisition of shares before or on January 31, 2018 i.e. the actual cost, is less than the fair market value of the shares as on January 31, 2018, then the fair market value will be regarded as the cost of acquisition for the purpose of the tax. The fair market value refers to the price listed on stock exchange as on January 31, 2018.
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