Social security contributions
Indian social security is broadly governed by the Employees’ Provident Fund and Miscellaneous Provisions Act 1952 (PF Act) and schemes made there under namely, the Employees’ Provident Fund Scheme (EPF) and the Employees’ Pension Scheme (EPS). The Employees’ Provident Fund Organisation (EPFO), a statutory body established by the government of India, administers social security regulations in India.
Currently, Indian social security regulations applies mandatorily to an establishment in India employing 20 or more persons or where an establishment voluntarily seeks registration with the authorities. Employees (including foreign nationals) working with an establishment in India to which the PF Act applies are liable to contribute towards the provident fund at the fixed rate of 12% of salary. The employer is required to make the matching contribution and deposit both the employer’s as well as the employee’s contributions (i.e. 24%) to the provident fund of the employee by the fifteenth day of the following month.
Out of the employer’s contribution of 12%, an amount equal to 8.33% of salary (salary capped at INR 15,000 per month in respect of Indian employees) is allocated to the Pension Fund of the employee.
The Government of India made the social security scheme mandatory for the cross border workers. A foreign national qualifies as an ‘international worker’, if he/ she is coming to work for an establishment in India to which the PF Act applies.
Similarly, an Indian national qualifies as an ‘international worker’, if he/ she has worked or is going to work in a country with which India has entered into a social security agreement (SSA) and is eligible to avail benefits under the social security program of the host country, according to the terms of the relevant SSA. However, it has been clarified that Indian Employees, holding certificate of coverage (COC)/ detachment certificate, obtained from Indian social security authorities and contributing to the Indian social security schemes, will not become international workers and will continue to be treated like any other domestic Indian employees. Also, Indian employees qualifying as an international worker on account of working/ having worked in a country with which India has a social security agreement, will re-acquire the status of Indian employee upon repatriation to India after completion of overseas assignment. Accordingly, such employees will not be subject to the special provisions applicable to international workers after repatriating to India.
An international worker, from a country with which India has a SSA in force, is exempted from Indian Social Security where he or she:
- is contributing to his/ her home country’s social security, either as a citizen or resident; and
- enjoys the status of ‘detached worker’ for the period, and according to the terms, specified in the relevant SSA.
Similarly, an international worker from a country with which India has entered into a bilateral comprehensive economic agreement prior to 1 October 2008 is exempted from Indian social security where:
- he or she is contributing to his/ her home country’s social security, either as a citizen or resident; and
- the agreement specifically exempts natural person of the other contracting country from contributing to the social security system of India.
Goods and services tax (GST)
The government of India took a landmark step and implemented the GST with effect from 1 July 2017. GST is an indirect tax, which is a transaction based taxation regime.
For smooth GST implementation, the government has formed a GST Council. The Council consists of the State Finance Ministers representing their states. The GST Council provides recommendations to the government on various aspects of GST law, such as rate revisions and amendments in GST rules, etc.
Prior to GST, there were multiple indirect taxes leviable on various transactions at each stage separately by the Union Government and the states at varying rates. Such taxes included excise duty, service tax, value added tax (VAT)/central sales tax (CST), entertainment tax, luxury tax, lottery taxes, state cesses and surcharges, etc. All such taxes (except customs duty) have been subsumed under GST, and there is one single tax applicable on supply of goods and services. However, there are a few products that continue to be outside the ambit of GST, like petrol, diesel, aviation turbine fuel (ATF), natural gas, crude oil.
GST is a comprehensive ‘consumption tax’ levied on the supply of all goods and services. Indian GST is a dual model:
- Central GST (CGST), levied by the Central Government.
- State GST (SGST)/Union Territory GST (UTGST), levied by the State Government/Union Territories.
In case of intra-state supply of goods and services, CGST+SGST/UTGST would become applicable, and in case of inter-state supply of goods and services, Integrated GST (IGST) would become applicable. IGST is a sum of CGST and SGST/UTGST. The rate of GST varies from 5% to 28% depending upon the category of goods and services, the general rate of tax being 18%. Additionally, some category of goods/services like vehicles, aerated beverages etc. notified by the government are subject to Compensation Cess under GST.
The threshold limit for the purpose of obtaining GST registration is INR 2 million (aggregate turnover in a tax year). For the purpose of the threshold, aggregate turnover shall be computed on an all India basis. For some specific categories of supplies and suppliers, the registration requirement is mandatory.
However, with effect from 1 April 2019, threshold for obtaining GST registration by a person, who is engaged in exclusive intra-state supply of goods is INR 4 million (aggregate turnover in a tax year) except in some specified cases.
Further, threshold for obtaining GST registration by a service provider continues to be INR 2 million.
Also, with effect from 1 February 2019 for some special category states making supply of goods/services viz. Arunachal Pradesh, Himachal Pradesh, Meghalaya, Sikkim and Uttrakhand threshold limit has increased from INR 1 million to INR 2 million. For other special category states threshold continues to be INR 1 million.
Similar to previous VAT laws, there is a concept of composition scheme under GST for small traders. Small traders having turnover of INR 10 million have an option to avail a composition scheme. Under the said scheme, GST at a lower rate (1% of the taxable turnover for manufacturer/traders and 5% in case of restaurants) would apply. The concept of composition scheme is not applicable for services except restaurant services.
With effect from 1 April 2019 threshold for composition scheme has been enhanced to INR 15 million.
In an effort to streamline real estate sector, recently, the Government had issued multiple notifications effective from 1 April 2019 for providing lower rate GST benefit to real estate.
The key aspect of this change was that an option was given to existing under construction projects to either adopt the new rate structure (1% or 5% without ITC) or continue with old GST rate (8% or 12% with ITC). This option was to be exercised till 20 May 2019.
Import of goods and services
The import of goods under the GST regime will be subject to IGST and Compensation Cess (if applicable), along with Basic Custom Duty (BCD) and Social Welfare Surcharge (upto 10% is also levied on the BCD). BCD and Social Welfare Surcharge paid at the time of imports are not available as credit under GST; consequently, they will always be a cost to the importer.
Similar to erstwhile service tax laws, on import of service, service recipient would be liable to pay IGST under reverse charge. Also, there are specified categories of goods and services notified by the Government on which GST needs to be paid by the recipient under reverse charge.
Zero-rated supplies/Export of goods and services
Export of goods and services are zero rated under GST. Exporters can claim refund of input tax credit of inputs/input services used in export of goods/services, subject to fulfilment of prescribed conditions. Per GST laws, exporters will be provided provisional refund within seven days from the date of acknowledgement. For claiming the zero rate on exports, there is a requirement to file bond/Letter of Undertaking (LUT) to the jurisdictional tax authorities. Alternatively, exporter can pay tax on output and claim refund of the same.
Also, the supplies to an SEZ for authorised operations have been made zero rated under GST. Unlike the erstwhile indirect tax regime, which involved a lot of paperwork for claiming export refund claims, a simplified online process for claiming refund of exports has been specified under GST. However, presently along with online refund application, documents need to be filed manually to claim refund claim.
To facilitate trade for small exporters, the concept of ‘merchant exporter’ has been introduced under GST. Accordingly, the merchant exporters will now have to pay nominal GST of 0.1% for procuring goods from domestic suppliers for export, subject to conditions specified in the notification.
Input tax credit (ITC)
Per ITC provisions stipulated under GST law, a registered taxable person is eligible to claim input credit of such goods and services that are used or intended to be used in the course or furtherance of business. However, there is a specified list of goods and services mentioned below where credit will not be available under GST:
- Personal use of goods and services procured.
- Goods and services being used for effecting exempt supplies.
- Supply of the following goods and services:
- Motor vehicles (credit available in certain cases where used for transportation business).
- Food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, except where such inward supply of goods or services of a particular category is used by a registered taxable person for making an outward taxable supply of the same category of goods or services.
- Membership of a club, health, and fitness centre.
- Rent-a-cab, life insurance, health insurance, except where the government notifies the services that are obligatory for an employer to provide to its employees under any law for the time being in force.
- Travel benefits extended to employees on vacation, such as leave or home travel concession.
- Works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service.
- Goods or services received by a taxable person for construction of an immovable property on one's own account, other than plant and machinery, even when used in the course or furtherance of business to the extend capitalised.
- Goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples.
Under GST, taxpayers are allowed to take credit of taxes paid on inputs (ITC) and utilise the same for payment of output tax liability. However, no ITC on account of CGST can be utilised towards payment of SGST/UTGST and vice versa. The credit of IGST is permitted to be utilised for payment of IGST, CGST, and SGST/UTGST in that order.
Recently, new rule for setting off of credit has been inserted which provides that IGST credit needs to be first utilised towards payment of output IGST liability. The remaining IGST credit can be utilised to offset CGST/SGST or UTGST output liability as the case may be in any order.
Also, it is pertinent to note that the credit pool is state-specific (i.e. IGST, CGST, and SGST of one state cannot be used to offset output of IGST, CGST, and SGST liability of another state).
There are three monthly returns for a normal taxpayer under GST viz. GSTR 1 for output (to be filed by the tenth day of the succeeding month). There is an option to file quarterly returns (to be filed by the last day of the succeeding quarter) for supplier whose turnover is in the previous or current tax year less than INR 15 million. File return for ITC (by the fifteenth day of the succeeding month), and a monthly tax return (by the twentieth day of the succeeding month), and one annual return (by 31 December of the succeeding tax year). Also, along with GST annual return suppliers whose turnover exceeds INR 20 million in a tax year are required to file GST Audit Report (by 31 December of the succeeding tax year). The Government has notified the GST Annual Return/Audit Report forms.
The Government has also issued a requirement to file monthly filing (to be filed by the twentieth day of the succeeding month), and such monthly return needs to be filed until September 2019.
Recently, the Government has proposed to implement new GST return system. Presently, prototype of return is available on the GST portal for trial run. It is expected that the new return system will be implemented in a phased manner with effect from October 2019.
The brief about the new return filing process is produced below.
There are three main components to the new return – one main return (FORM GST RET-1) and two annexures (FORM GST ANX-1 [output supplies] and FORM GST ANX-2) [inward supplies].
From October, 2019 onwards, FORM GST ANX-1 shall be made compulsory and FORM GSTR-1 would be replaced by FORM GST ANX-1. The large taxpayers (i.e. those taxpayers whose aggregate annual turnover in the previous tax year was more than INR 50 million) would upload their monthly FORM GST ANX-1 from October, 2019 onwards.
However, the first compulsory quarterly FORM GST ANX-1 to be uploaded by small taxpayers (with aggregate annual turnover in the previous tax year upto INR 50 million) would be due only in January, 2020 for the quarter October to December, 2019.
It may be noted that invoices etc. can be uploaded in FORM GST ANX-1 on a continuous basis both by large and small taxpayers from October, 2019 onwards.
FORM GST ANX2 can be viewed simultaneously during this period but no action shall be allowed on such FORM GST ANX-2.
For October and November, 2019, large taxpayers would continue to file FORM GSTR-3B on monthly basis. They would file their first FORM GST RET-01 for the month of December, 2019 by 20 January 2020.
The small taxpayers would stop filing FORM GSTR-3B and would start filing FORM GST PMT-08 (tax payment return replacement of GSTR 3B) from October, 2019 onwards. They would file their first FORM GST-RET-01 for the quarter October, 2019 to December, 2019.
Concept of e-invoicing under GST
The Government is proposing to introduce an e-invoicing system under GST for B2B transactions with effect from 1 January 2020. Under such system, the Companies would be required to generate an invoice reference number (IRN) for each B2B invoice (including debit/ credit note) over a specified limit. Such IRN needs to be mentioned on the invoice and such an invoice would be treated as valid document for the purpose of claiming credit. The purpose of such system seems to be to curb tax evasion/irregular credit claims as the data generated on such system would be available to the Government on real time basis and the return data would also get automatically populated based on the same.
With effect from 1 October 2018 Government has made tax deducted at source/tax collected at source provisions stipulated under GST laws effective.
Tax deducted at source provisions are applicable on certain specified cases. The notified taxpayer like Government, Public Sector Undertakings etc. are required to deduct 2% tax deducted at source (1% CGST, 1% SGST or 2% IGST) (withholding tax) on payments made to goods/services suppliers in case payment exceeds INR 0.25 million. The tax so collected would be available as credit to the supplier in its electronic cash register, which can be used for set-off against future tax liabilities.
Tax deducted at source provisions are applicable for e-commerce operator. Every e-commerce operator is required to deduct 1% tax collected at source (0.5% CGST, 0.5% SGST or 1% IGST) on net value of supplies provided by suppliers through e-commerce portal.
The due date of filing monthly tax deducted at source return (GSTR 7) for the period October 2018 to December 2018 has been extended upto 31 January 2019. This has been further extended to 31 August 2019.
The due date of filing tax collected at source return (GSTR 8) is tenth of the next month
The recent amendments along with the effective date is mentioned below.
- Specific credit restriction in respect of general insurance, servicing, repairs and maintenance, hiring, leasing etc. in respect of motor vehicle except when used for specified purposes (like used in further supply of vehicles, for transportation of goods/ passengers etc.) – Effective date 1 February 2019.
- ITC of goods and services which are obligatory for an employer to provide to its employees, under any law for the time being in force, will be available – Effective date 1 February 2019.
- Threshold limit for composition dealers to be increased from INR 10 million to INR 15 million – Effective date 1 April 2019.
- Credit of State tax/Union territory tax to be utilised for payment of integrated tax only when the balance of the ITC on account of central tax is not available for payment of integrated tax – Effective from the date when such functionality is available on GST portal. The functionality has been recently made available on the portal.
- Credit of integrated tax to be fully utilised first for payment of integrated tax, central tax or state tax output tax liability – Effective from the date when such functionality is available on GST portal. The functionality has been recently made available on the portal.
- Safeguards, procedure and threshold for suppliers who have defaulted tax payment and such default has continued for more than two months to be prescribed – to be notified. Fungibility of IGST, CGST, SGST/UTGST or cess (GST tax heads) in the electronic cash ledger has been allowed under GST rules. Earlier tax paid inadvertently under wrong GST head could not be transferred to correct GST head. This caused undue hardships to the taxpayers. Now, amendment has been made in the GST Act/ Rules to allow transfer of tax paid between GST heads. In this regard Form PMT -09 has been introduced. However, presently such functionality is presently not available on the portal.
- New provision on procedure for ITC availment – to be applicable with new return filing system.
- For claiming ITC, the recipient would be required to verify, validate, modify or delete the details furnished by suppliers on GST portal - procedure to be notified.
- In case the outward supply is not reported by supplier in his GST return (like return not filed), then recipient can avail maximum credit equivalent to 20% of the ITC available.
- Where credit has been availed basis invoice, the recipient would be liable to pay credit so availed in case where return has not been furnished by the supplier.
- Procedure for recovery of tax amount/credit wrongly availed (for amounts more than INR 1,000) to be notified.
Customs duty is levied by the Central Government on goods imported into, and exported from, India. The rate of customs duty applicable to a product imported or exported depends upon its classification under the Customs Tariff Act, 1975. With regard to exports from India, customs duty is levied only on a very limited list of goods.
The Customs Tariff is aligned with the internationally recognised Harmonised System of Nomenclature (HSN) provided by the World Customs Organisation (WCO).
Customs duty is levied on the transaction value of the imported or exported goods. According to section 14 of the Customs Act, 1962 (CA), the concept of transaction value is the sole basis for valuation for the purpose of import and export of goods. While the general principles adopted for valuation of goods in India are in conformity with the World Trade Organisation (WTO) agreement on customs valuation, the Central Government has framed independent Customs Valuation Rules that apply to the export and import of goods.
The customs duty applicable to any product is composed of a number of components, which are as follows:
- The import of goods under the GST regime will be subject to IGST and Compensation Cess (if applicable).
- BCD is the basic component of customs duty levied at the effective rate under the First Schedule to the Customs Tariff Act (CTA) and applied to the landed value of the goods (i.e. the cost, insurance, and freight [CIF] value of the goods). The peak rate of BCD is 10%.
- BCD and Social Welfare Surcharge (at 10% are also levied on the BCD). BCD and Social Welfare Surcharge paid at the time of imports are not available as credit under GST; consequently, they will always be a cost to the importer.
The duty incidence arising on account of the IGST may be set off or refunded, subject to prescribed conditions. Where goods are imported, the Indian supplier may take credit of the IGST paid at the time of import for offset against the output IGST, CGST, and SGST liability. Also, the Central Government provides exemption from payment of BCD and IGST on import of certain specified goods, subject to fulfilment of prescribed conditions. For example, goods imported for petroleum operations are exempt from BCD.
During April, 2018 Central Board of Indirect Taxes and Customs (CBIC) notified the Pre- Consultation Regulations under customs law. Under the said regulations, before issuance of notice, importer will be informed in writing along with grounds the intention of issuing the notice. The importer within 15 days is expected to respond in writing including the option to be heard in person. In absence of response within the time period specified, the officer will proceed with issuance of notice.
Further, CBIC had recently instructed custom and GST formations to verify the correct availment of ITC by few exporters who are perceived as “risky” on the basis of pre-defined risk parameters.
The e-way bill is an electronic bill that will be required for the movement of goods in case the value of the consignment is above INR 50,000. The movement of goods may be (i) in relation to supply, (ii) for reasons other than supply, or (iii) due to inward supply from unregistered persons.
The bill can be generated from the GSTN portal and every GST registered taxpayer is required to comply with the requirement to issue e-way bill.
With effect from 16 November 2018 new enhancements have been made in the e-way bill system which involves checking of duplicate e-way bills, Complete Knock Down/Semi Knock down movement of goods imported/Exported, shipping address to be mentioned on e-way bill for goods exported out of India etc.
Recently, new rule has been inserted which provides that a person including consignor, consignee, transporter, courier agency or an e-commerce operator who have not filed their GST returns for a consecutive two tax periods would not be allowed to generate e-way bill. The said rule would be made effective from 21 November 2019.
Advance rulings for Customs and GST
To enable foreign investors to ascertain their indirect tax liabilities arising from proposed business ventures in India, the Central Government has constituted the Authority for Advance Rulings (AAR) as a high-level, quasi-judicial body. The functions of the AAR consist of giving advance rulings on a specific set of facts relating to specified matters under customs and GST.
Advance rulings may be sought by any resident/non-resident investor entering into a joint venture in India in collaboration with another non-resident or resident of India, or by a resident setting up a joint venture in India in collaboration with a non-resident. Through the Finance Act 2005, this facility has also been made available to existing joint ventures in India. The Central Government is also empowered to include any other class or category of persons as eligible for the benefit of an advance ruling. Under the customs law, the Central Government has allowed a ‘resident public limited company’ to be eligible for an advance ruling. Under the erstwhile excise and service tax regime, advance rulings could be given only on a proposed transaction, whereas under GST, advance rulings can be obtained on a proposed transaction as well as a transaction being undertaken by the appellant.
In terms of GST provisions, the following matters/questions specified can be sought before the AAR:
- Classification of any goods or services, or both.
- Applicability of a notification issued under the provisions of the CGST Act.
- Determination of time and value of supply of goods or services, or both.
- Admissibility of ITC of tax paid or deemed to have been paid.
- Determination of the liability to pay tax on any goods or services, or both.
- Whether applicant is required to be registered.
- Whether any particular thing done by the applicant with respect to any goods or services, or both, amounts to or results in a supply of goods or services, or both, within the meaning of that term.
The comprehensive provision for advance rulings is provided under GST to ensure that disputes are minimal. Timelines are also given within which the ruling is to be given by the concerned authority. The aim is to provide certainty to the taxpayer with respect to one's obligations under the GST Act and an expeditious ruling, so that the relationship between the taxpayer and administration is smooth and transparent and avoids unnecessary litigation.
Kerala Flood Cess
To compensate the loss arisen due to massive floods occurred in the State of Kerala in August 2018, Kerala Compensation Cess (KFC) at the rate of 1% over and above GST has been imposed in Kerala. KFC is to be levied from 1 August 2019 on intra-state supplies of goods/services to unregistered persons in Kerala. This Cess will be levied for two years in Kerala. In this regard Kerala Flood Cess Rules, 2019 have been notified which provides separate compliance requirement (additional to existing GST compliances) for registration, tax payment, filing of KFC return etc.
Amnesty Scheme under Indirect Tax
Various states viz. Gujarat, Maharashtra, Karnataka, Haryana etc. have introduced amnesty scheme for settlement of past VAT dues with waiver (certain percentage) of tax dues, interest and penalty dues subject to fulfilment of prescribed conditions.
Sabka Vishwas (Legacy Dispute Resolution) Scheme 2019
Recently, similar to state amnesty scheme Central Government with effect from 1 September 2019 has notified one-time amnesty scheme for liquidation of past disputes of Central Excise and Service tax (erstwhile indirect tax laws). The brief about the scheme is produced below.
All person except following can avail benefit of the scheme –
- Whose reply/appeal has been finally heard as on 30 June 2019.
- Who have been convicted for any offence.
- Who have been issued a show cause notice for refund.
- Who have been subject to audit/enquiry/investigation, but the duty has not been quantified as on 30 June 2019.
- Making voluntary disclosure in certain circumstances.
- Who intend to file declaration in respect of tobacco and related products, petroleum, etc.
The benefits of the scheme are produced below.
- Relief for tax dues from 40% to 70% in specified scenarios.
- Complete waiver of interest and penalty.
- Waiver from prosecution.
- Conclusion of proceedings covered under the scheme for the relevant period.
- All proceedings pending below the level of High Court are deemed to be withdrawn.
This onetime dispute resolution scheme is a welcome step towards addressing long-pending litigations. With complete waiver of interest, penalty and prosecution, and part waiver of tax dues, this would be an opportune moment for taxpayers to review their old tax disputes for early closure.
 INR 1 million for some special category States (North-Eastern States)
 Extended to eleventh day of succeeding month for the period July 2018 to March 2019. Further, extended to eleventh day of succeeding month for the period April 2019 to September 2019.
There are no wealth taxes in India.
Inheritance, estate, and gift taxes
There is no inheritance tax in India.
There is no gift tax liability on the donor. However, any sum of money aggregating to INR 50,000 or more received during the relevant tax year without consideration or for an inadequate consideration by an individual from any person not being a relative (see below for details) is subject to income tax in the hands of the recipient.
Similarly, the following receipts are also subject to tax:
- Any specified movable property/sum of money received without consideration, the FMV of which exceeds INR 50,000: Total amount is taxable.
- Any specified movable property received for a consideration less than FMV, where the difference of the FMV and a consideration is more than INR 50,000: Such difference is taxable.
- Any immovable property received without consideration, the stamp duty value of which exceeds INR 50,000: Total amount of stamp duty value is taxable.
- Any immovable property received for a consideration less than stamp duty value, where the difference of the stamp duty value and consideration is more than the higher of INR 50,000 and 5% of the consideration: Such difference is taxable.
The above receipts are not considered as taxable if the same is/are received from any relative, i.e.:
- brother or sister of the spouse
- brother or sister of either of the parents of the individual
- any lineal ascendants/descendants of the individual or spouse of the individual, or
- spouse of individual or of any of the above.
Further, the same are not considered as taxable if received on the occasion of marriage, under a will/inheritance, in contemplation of death of the payer, or through any other criteria specified in the law.
There is no comprehensive system of property taxation. Not only does it differ amongst the states, but it also varies between the municipalities within the states. The rate of tax levied is generally related to the prevailing market prices for property in each locality.
Capital gains taxes
As a general rule, capital gains from the disposal of capital assets are liable to tax in the tax year in which such assets are sold or transferred. Capital assets include all forms of property, stocks and shares, land and buildings, goodwill, etc. (but exclude personal effects except stock-in-trade, stores, and raw materials held for business purposes). Jewellery although forms part of capital asset.
Categorising capital gains
Capital assets held for more than 36 months (12 month in the case of shares or securities listed on a recognised stock exchange in India/ equity oriented mutual funds/ zero coupon bonds and 24 months for immovable property or unlisted shares) are termed as ‘long-term capital assets’ and the assets not so held are called ‘short-term capital assets’. Capital gains arising from the transfer/ disposal of long-term capital assets are called long-term capital gains (LTCG). Gains arising from the disposal of short-term capital assets are called short-term capital gains (STCG). This distinction is important as LTCG are taxed or treated beneficially and there are also planning opportunities to save taxes provided the consideration or gain is re-invested, subject to fulfilment of certain other conditions.
LTCG is subject to tax at prescribed beneficial rates (plus applicable SC and HEC). STCG is added to the taxable income of the individual and subject to tax at normal slab rates.
Computation of LTCG
Except in case of debentures and bonds (other than capital indexed bonds issued by Government/ Sovereign Gold Bonds issued by RBI), the cost of acquisition of long term capital assets is determined after indexing costs by a prescribed inflation factor (known as ‘indexed cost of acquisition’). The base year for computation of indexed cost of acquisition is 2001. Assets acquired before 1 April 2001 can be taken at actual cost or FMV as on 1 April 2001 at the option of the taxpayer.
In case of NRs where shares or debentures of an Indian company are purchased by utilising foreign currency, the subsequent capital gains are determined by computing the gains in the same foreign currency in which it was purchased and reconverting the gains into Indian rupees to calculate the tax payable on the same.
However, there are few exceptions for indexation and rate of tax on LTCG/ STCG:
- Effective 1 April 2018, LTCG arising on transfer of equity shares in a company or a unit of equity oriented mutual fund or a unit of business trust [on which securities transaction tax (STT) has been paid] shall be taxable at the rate of 10% (without any indexation benefit). However, there is no tax on gains up to INR 0.1 million.
- It is important to note that gains accrued based on FMV as on 31 January 2018 has been grandfathered, i.e. would not be liable to tax.
- For transaction of sale effective 1 April 2018, in respect of above mentioned capital assets already held from a date prior to 31 January 2018, the cost of acquisition would be determined as higher of the following:
- Actual cost of acquisition, and
- The lower of:
- FMV as of 31 January 2018
- The full value of consideration arising on transfer
- Tax on LTCG (arising to any person) on transfer of securities (other than units) listed on recognised stock exchange in India or a zero coupon bond is computed at the lower of 10% on gains computed without indexation or 20% of gains computed with indexation (if applicable).
In case of NR, if the securities are not listed on Indian recognised stock exchange, the tax on corresponding LTCG is computed at 10% (without indexation).
- STCG earned on equity shares and equity oriented mutual funds and a unit of business trust which are listed on a recognised stock exchange in India is taxable at 15% provided STT has been paid on sale.
Note 1* - The surcharge rate of 25%/37% shall not apply to capital gains arising on sale of equity share of a listed company or a unit of an equity oriented mutual fund or unit of business trust. The enhanced surcharge rates of 25%/37% shall also not apply to the income of foreign institutional investors (FIIs) arising from securities prescribed under the Act.
Note 2* - For NRs the basic exemption limit of INR 250,000 does not apply against the gains earned on sale of such shares/ units.
Tax lability on LTCG can be reduced by taking benefit of exemptions provided in the Act when gains/ sale proceeds from the sale of the capital assets are reinvested into house property and or prescribed investments, as the case may be.
Short-term capital losses can be offset against any capital gains (long-term or short-term). Long term capital loss can only be offset against LTCGs. Unabsorbed capital losses (short-term or long-term) can be carried forward for a maximum of eight years to be offset only against future capital gains as mentioned above.
In order to raise funds for the “Start-up Action Plan,” the Government has provided an exemption from LTCGs on sale of any long-term capital asset, if the sale consideration is invested in units of a specified fund. The specified fund will be notified by the Central Government in due course and the maximum deduction available will be INR 5 million. The investments should be held for a minimum period of three years to avail the exemption.
Effective 1 April 2019, once in a life time option has been given to individual/ hindu undivided family (HUF) wherein LTCG (up to INR 20 million) arising from transfer of a residential property can now be reinvested in two house properties in India. Further, an individual/ HUF selling a residential property also has the option to reinvest the LTCG by subscribing to shares of a company which qualifies as a small or medium enterprise and also in shares of eligible start-ups with no cap on reinvestment of the capital gain. Investments under this provision can be made up to 31 March 2021. In case the eligible start up is a technology driven start up, it will be entitled to utilise the proceeds of such equity shares in computers or computer software.
On account of transaction in immovable property, any income earned is either taxed under income from capital gains or income from other sources. The income is taxed on the basis of the sale consideration or stamp duty value, whichever is higher. In case the sale consideration is less than the stamp duty value, the differential is taxed as income from other sources. However, effective 1 April 2019, in case of sale, no such adjustments shall be made in case where the difference between stamp duty value and sale consideration is not more than 5% of such sale consideration. In case of purchase, if the variation between stamp duty value and sale consideration does not exceed INR 50,000 or 5% of sale consideration, no addition is to be made to total income.
Securities transaction tax
STT is applicable to transactions involving purchase/ sale of equity shares, derivatives, units of equity-oriented funds through a recognised stock exchange, or purchase/ sale of a unit of an equity-oriented fund to any mutual fund. The STT leviable for such transactions varies for each kind of instrument, whether delivery based or non-delivery based.
Buyback of shares
An additional tax is payable on transactions involving buyback of shares by both listed and unlisted companies from its shareholders. Buyback of unlisted shares attracts additional tax at 20% (plus surcharge and cess) in the hands of the company distributing the income on such buyback. The buyback consideration received would be tax exempt in the hands of the receiver. No tax credit would be allowed in respect of such taxes paid, to the company or to the shareholder.
Now, the law has been amended to include such tax on buyback of listed shares. Corresponding amendment is introduced to exempt income received by the shareholders on buyback of listed shares.
The amendment is effective from 5 July 2019.