Under the existing capital gains taxation regime, beneficial tax rates have been provided for income arising from the sale of listed equity shares. Even the period of holding of shares by the equity investors, which determines the applicable tax rates, is different in the case of listed shares and unlisted shares.
Gains on listed shares are considered long-term if held for more than 12 months and taxed at a concessional rate of 11.96 per cent. Whereas gains on unlisted shares are considered long-term if held for more than 24 months and are taxable at the rate of 23.92 per cent. Short-term gains on listed shares are taxable at 17.94 per cent and on unlisted shares are taxable at applicable slab rates.
Such a disparity has an impact on the growth of private equity markets in India attracting the larger investor crowd to invest in the listed market which provides higher liquidity and lower tax cost.
It can also be noted that the applicable tax rate for non-resident investors investing in long-term unlisted shares in India is restricted to 10 per cent thereby being at par with the tax rate provided for the listed shares. The rates for resident investors should also be reduced to bring in a level playing field.
In Budget 2022, the Finance Ministry addressed the issue of differential surcharge rates applicable on long-term capital gains in the case of listed and unlisted securities by capping the surcharge rate on long-term capital gains at 15 per cent.
Earlier only the surcharge rate on long-term capital gains on listed equity shares was capped at 15 per cent. However, long-term gains arising on unlisted shares attracted surcharge of as high as 37 per cent in the case of individual taxpayers having an annual total income of more than Rs 5 crore.
The said amendment brought relief to High-Net worth Individuals, particularly those investing in start-ups and also leads to a great impetus to investments made by the investors in the fund industry. Budget 2022 however did not address the differential tax rates and holding periods between listed and unlisted shares, thereby, still leaving room for disparity for the private equity investors.
Bringing in parity in taxation of unlisted shares would result in direct growth for the start-up industry which has always been the focus area for the Government.
The PE/VC sector would also see major growth as the fund industry predominantly invests in the unlisted markets. This would mean more private capital pool for fund managers and hence more funds for the early-stage entities.
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It cannot be denied that the current capital gains tax framework in India is very complex in terms of the difference in taxation based on different classes of assets, period of holding, availability of indexation benefits, computation mechanism, etc. and needs a relook.
With Budget 2023 around the corner, it is expected that the tax authorities will consider restructuring the capital gains tax regime making it simpler and bringing uniformity. A streamlined mechanism is expected to be introduced wherein any gains on securities shall be considered long-term if held for more than 12 months and taxable at the rate of 10 per cent without any complex computation rules. Short-term gains on securities held for less than 12 months should be taxed at the concessional rate of 15 per cent.
Some other expectations could be a reduction in the tax rates for dividend income. With the abolition of the dividend distribution tax, the dividend income is currently taxable in the hands of shareholders at slab rates with the surcharge rate capped at 15 per cent. This results in an effective tax rate of as high as 35.88 per cent. In the case of non-residents, the dividend income is taxable at a lower rate of 20 per cent or lower, considering tax treaty benefits, resulting in a considerable difference in the applicable tax rates for residents and non-resident investors.
Budget 2023 is expected to be a taxpayer-friendly budget considering that the global economies are sliding towards recession. Rationalisation in capital gains tax rates and simplification in the computation mechanism could boost investments and growth in the country.
(Bhatia is Partner – Tax & Regulatory Services at BDO India. The views expressed are personal)
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