Capital gains is the fastest growing income class in India; it deserves to be taxed at a higher rate, on the grounds of raising revenues for the government as well as equity and fairness, Dr TV Somanathan, Finance Secretary, said today.
In a conversation with Raghuvir Srinivasan, Editor, businessline, at a post-budget discussion organized by the newspaper today, Somanathan said that the increase in capital gains taxes was motivated by three factors. The “primary motivation” was to simplify the tax structure. Earlier, there were varied rates for different asset classes and different periods of holding the assets. Now, in response to calls for simplification, the structure has been simplified. The taxes are 12.5 per cent for all long-term capital gains and the duration for qualifying for long-term, is one year for listed securities and two for unlisted.
The second motivation, he said, was to raise revenues. In this context, he observed that ‘capital gains’ was the fastest-growing asset class in the country. Pointing out that India’s capital gains taxes, even after the recent hike, were still lower than most developed countries, Somanathan stressed that “India needs taxation—we have to gather taxes at moderate rates.”
Finally, stressing that it was his personal opinion and not necessarily that of the government, Somanathan said that it was only proper to raise taxes on capital gains because a concessional rate of tax on capital gains is unfair to those who earn incomes through other means.
The Finance Secretary pointed out that capital gains taxes in India, even after the recent hike, were much lower than developed countries. As an example, he mentioned that Canada taxes capital gains at half the applicable rate, whereas most other countries have a flat rate. He admitted that there was a justification for capital gains taxes to be lower than applicable rates because capital gains occur intermittently and could push the taxpayer into a higher tax bracket in the year it occurs. But, what the lower rate should be, is a matter of the respective government’s decision. The Indian government has decided that long-term capital gains should be 12.5 per cent and short-term 20 per cent.
Somanathan said that the country should get used to paying taxes at moderate rates and pointed out that “our tax-GDP ratio is not high, our capital gains tax to overall tax ratio is much lower than in most other developed countries.” He noted that India “cannot have a world-class Capital Market and not expect to have some amount of reasonable taxes levied on capital gains.”
On the real estate front, he said that the decision to remove “indexation” (taking into account the effect of inflation while calculating capital gains) would benefit the taxpayer, noting that if the capital gain arising out of a real estate transaction were to be higher than 10 per cent, the 12.5 per cent rate of tax, without indexation, would be better than the previous 20 per cent with indexation.
Somanathan also noted that while the idea behind raising long-term and short-term capital gains taxes on asset classes such as securities was to raise revenues, for real estate gains, no revenue gains were expected--the change in taxes would be revenue neutral to the government.
Liberal rate
Describing the 12.5 per cent rate as “liberal”, Somanathan said that a person who makes capital gains on real estate has the option of avoiding a tax liability by reinvesting the gain in another property or buying capital gains bonds.
“I think for a sector which is relatively opaque pricing is often undervalued for various reasons, such as stamp duties, 12.5 per cent is a reasonable rate,” he said.