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Informist, Wednesday, Jul 24, 2024

 

--CBDT head: Aim to deter, normalise equity F&O volume with tax change

--CONTEXT: CBDT head Ravi Agrawal's comments in interview to Informist

--CBDT head: Govt keeping an eye on equity F&O trade volumes

--CBDT head: In transition phase between old, new tax regimes

--CBDT head: Niche incentive for new tax regime via more NPS deduction

--CBDT head: Want taxpayers to see new tax regime as more beneficial

--CBDT head: New tax regime to benefit realty investors in most cases

--CBDT head: LTCG taxpayers mostly high-income, wanted more revenue

--CONTEXT: Budget hiked long-term capital gains tax to 12.5% from 10%

--CBDT head: Don't want to dictate invest activity through direct tax

--CBDT head: To impose 1% tax collected at source on luxury goods

--CBDT head: Will notify list of luxury goods for 1% tax at source

--CBDT head: Luxury items taxed 1% at source may include watches, cars

--CONTEXT: Budget moots 1% tax at source on 1-mln-rupee or more items

--CBDT head: Hope to raise 80 bln rupees from STT in FY25

--CBDT head: Review of Income-Ttax Act to simplify it for taxpayers

--CBDT head: Review of Income-Tax Act to integrate it with tech

--CBDT head: Personal tax tweaks aim to boost disposable income

 

By Priyasmita Dutta and Aaryan Khanna

 

NEW DELHI - The government has been keeping an eye on ballooning trade volumes in the equity futures and options segment, where many retail participants have burnt their fingers in the last few years. And tweaks to the securities transaction tax in the 2024-25 (Apr-Mar) Union Budget aim to deter and normalise these volumes, according to Ravi Agrawal, chairman of the Central Board of Direct Taxes.

"On the STT front, the volume of the transactions on the F&O section has gone up exponentially, and it is more a speculative sort of a thing, and a risky area where even the middle class is also venturing into," Agrawal told Informist in a post-Budget interview today. "The gains are there, and therefore, there was a need also to sort of deter (them) and also normalise this."

 

The Budget, presented by Finance Minister Nirmala Sitharaman on Tuesday, proposed an increase in the securities 

transaction tax to 0.1% of the option premium on sale of options and to 0.02% of the price of futures on sale of futures in securities. Currently, the securities transaction tax on sale of an option is 0.0625% and on sale of futures is 0.0125%. The hike in securities transaction tax will come into effect from Oct 1.

 

According to brokerage ICICIDirect, India's monthly futures and options turnover rose over 40 times in five years to 8,740 trln rupees in the month of March. In April, a total of 8.48 bln contracts were traded on the National Stock Exchange, the highest among all global bourses, the brokerage said.

 

The changes in securities transaction tax should boost receipts by about 80 bln rupees in the current financial year, Agrawal said. Despite these measures, the government's focus is not to dictate where investments are made, a key reason for the transition to the new tax regime. The personal income tax changes announced in the Budget will add to citizens' disposable income, with no prompts for parking cash like the old tax regime, which provided tax incentives for certain investments, he said.

 

"...the taxpayer is not being forced to make savings as mandated in the Income-Tax Act, you can take a call and therefore, that scope (of using the savings) gets widened," Agrawal said. "And maybe if the taxpayer finds value in investing, participating in the equity market, so be it. He has a disposal income, he goes there, and he gets profit and it's fine."

 

The CBDT head, who assumed office on Jul 1, said India's taxation system was in a transition period. The government was working to convince taxpayers about the new tax regime, and about two-thirds were opting for it when filing returns in the current financial year. The government introduced a deduction in the new tax regime as a niche tax incentive to nudge taxpayers, though Agrawal did not say whether more deductions will be introduced to the new regime in the future.

 

In the Budget, Sitharaman announced three measures to boost social security, including increasing deductions allowed to non-government employees for contributing to the National Pension System from the current 10% of salary to 14%.

 

Agrawal also shed light on another new proposal of levying tax collected at source on luxury items with value exceeding 1 mln rupees. He declined to give a timeline on notifying the changes, but said the list would be revised from time to time. This will help the government keep track of high-value investments, and could be levied on goods like watches and cars, the tax official said.

 

Below are edited excerpts of the interview, which includes clarification on more Budget tax changes, the benefits of these changes to real estate investors, and the vision of a revamped Income-Tax Act after six decades:

 

Q. Has the increase in securities transaction tax and capital gains tax been proposed to take the wind out of the sails of equity indices? 
A. No, that is never the intention. What the data reflects is that these capital gains on equity were actually being reflected and being claimed mostly by people who have a large income, and therefore, there was a scope for more revenue on that front and that's why (we raised it) from 10% to 12.5%. On the STT front, the volume of the transactions on the F&O section has gone up exponentially, and it is more a speculative sort of a thing and a risky area where even the middle class is also venturing into. The gains are there, and therefore, there was a need also to sort of deter (them) and also normalise this. The government saw some revenue there also. So, these were the intentions.

 

And when this increase of 10% to 12.5% tax on equity and other units has happened, at the same time the (exemption) limit of 100,000 rupees has been increased to 125,000 rupees. So for a normal common investor, that cushion is there. We've done some working and what one gets is that in one year, and if the equity valuation has increased by about three times, the new regime is beneficial. And if it is beyond three, then of course, pay more tax. So that way it actually balances both the requirements.

 

Q. Do you have any estimate on how much you would actually see coming in from just the changes in the securities transaction tax?
A. Changes in the STT would add around 80 bln rupees. That's what we are expecting.

 

Q. Does the government see real risk in current levels of retail participation in segments such as F&O, and want to augment SEBI's measures on the same?
A. Well, it's all one government, I would say.

 

Q. "A non-government employee in the new tax regime shall be allowed deduction of an amount not exceeding 14% of the employee’s salary in place of 10%." Does this mean an exemption, or deduction, is now available in new tax regime as well?
A. No. So, there are two components. One is the employer, the other is the employee. So, till now a private employer was being allowed a deduction of 10% as expenditure when he is computing his profits and gains from business processes. That increases to 14%, his contribution.

 

Under the new tax regime, on the employee side, there is a option. In case he opts for new regime, then he gets a deduction under section 80 CCD at 14%. In case he goes for old regime, then the deduction would be 10%. So it is an incentive for the employee to opt for the new regime.

 

Q. Then this is new - taxpapers getting such benefits and deductions in the new tax regime?
A. Yes, so basically this is nudging the taxpayer to moving towards the new tax regime.

 

Q. Is it sustainable or desirable to run two tax regimes in tandem? You've said around 70% of current filing has come into the new tax regime, and have increased those benefits in this Budget.
A. Well, this is basically a transition stage, and people have to be convinced that the new regime actually brings value to them. The fact that about two-thirds of the people have already opted on their own accord reflects that there is a broad acceptability of the new regime. Because conceptually it is something like whether I am okay with the deductions or I would say, "Forget about the deductions, let me go for the new regime."

 

Last year, the traction was not that much, but now it is encouraging and maybe going forward once substantial number of people on for the new regime, then we will see what to do with the old regime.

 

Q. Would you be open to introducing more deductions in the new regime? Isn't that against its ethos?
A. No, basically it is a very very specific deduction. For example, investment and savings are on his (taxpayer's) own accord. Something like this transaction where NPS is being credited, so there's a different nature of the transaction.

 

Q. With the personal tax changes proposed on Tuesday, do you think that is going to give a sustainable impetus to consumption? Do you think you have done enough on that front?
A. For a taxpayer who is having about 1.5 mln rupees of income and is in the salaried class, the tax saving is about 17,500 rupees. So that is the additional amount that he gets.

 

The other thing is that the taxpayer is not being forced to make savings as mandated in the Income-Tax Act, you can take a call and therefore that scope (of using the savings) gets widened. Why should we actually prompt the taxpayer that you save only in this instrument or that. And maybe if the taxpayer finds value in investing, participating in the equity market, so be it.

He has a disposable income, he goes there, and he gets profit and it's fine. Why should that taxpayer be actually prompted?

 

So the government doesn't have a problem with that. But at the same time, the government is conscious about this, that once we actually rationalise taxes and make (cash) available to the taxpayer, the taxpayer will take a conscious call and a mature call as to how to take care of the security.

 

Q. There is a mention of 1% TCS on items valued above 1 mln rupees. Can you give us details of these items, and by when will you decide and notify?
A. Those would be prescribed from time to time. For example, watches or other luxury goods across the board.

 

Q. Such as high-end cars as well?
A. Yes. If its value is more than 1 mln rupees, then of course, to keep a track and tab on the investments. This will be known to people, this will be duly notified, whatever goods on which TCS has to be done. Therefore, one has to do that notification and then there is a whole list of logistics also.

 

Q. When should we expect the first notification?
A. Well, I think we would further process it. I cannot give a timeline on that.

 

Q. The Budget proposed to exempt certain finance companies located in International Financial Services Centre from thin tax (Section 94B of Income Tax Act). Can you update us on which type of companies will be exempted?
A. These are basically companies which are finance companies and which would be registered in IFSC. The finance companies and the NBFCs that are not registered with IFSC, they already have this benefit. This is being extended to even the companies which are registered with IFSC. So it is basically meant to bring parity amongst companies on this thin capitalisation.

 

Q. You've reduced the corporate tax revenue estimate between the Interim and full Budgets. Why?
A. On the corporate side, there is no change in the tax except for in the case of foreign companies, the tax has reduced from 40% to 35%, so that is also one impact. And then, based on the actual realisation on Mar 31, because when we came up with the Interim Budget it was an estimation. It was based on the actuals that this projection has been done.

Q. What prompted this comprehensive review of the Income-Tax Act?
A. There is an ask from the taxpayer, that your income tax act is complicated. So now we feel that yes it's time that we actually take a review of the Act and see what redundancies are there in the sections. For a common person, psychologically that is a barrier. We have introduced technology and we have made it easy so far as filing of the returns is concerned.

 

Can we align that with the Act? Can we make these provisions simpler? Can we present the provisions in the manner that it becomes easier for the person to comprehend. So these are the thoughts.

 

Q. How much tax did you collect from cryptocurrency transactions in 2023-24? Do you see it similar or higher this year? 
A. So, from crypto, the TDS was around 2.25 bln rupees. The rate of tax has remained the same, 1%, so it depends on the quantum of the transactions. So last two years one finds that it is more or less of the same order. So, there is no reason why we should expect that it should come down.

 

Q. Are there any tweaks expected in the Finance Bill to facilitate Pillar 2 taxation?

A. Yeah, so that would be only when the government takes a call about the approach to be adopted and then how do we actually go about it, to what extent we are agreeable on that and then accordingly we will take that call.

 

Q. There has been a pushback from the retail side on the removal of indexation benefit for real estate. So, is there a rollback expected?

A. This capital gains tax regime that has been proposed in the bill, that has been done after a lot of deliberations and there was a ask also from the taxpayer to make the thing simpler.

When you make the thing simpler, there is some give and there is some take. But look at it from a practical point of view. If in 10 years the property rate has gone up by 3 times or more, the new tax regime is beneficial.

 

Cost indexation was on the conservative side. The way a property's price has gone up, the valuations have gone up. In most of the cases -- I would not say in all cases, but in most cases -- the new tax regime would be beneficial. Plus, then there is always the existing facility provisions of rollover that is also there.

 

Then the rationalisation of the holding period, that has also changed. Now rollover, after a year will be counted as long-term instead of short-term capital gains. In totality you find that the new tax regime is beneficial. So, it is not a question of only mathematics. It is what we have to see it practically in the market what is happening.

 

Q. On the flip side, the real estate market is already quite hot and there are conversations about asset bubbles. Is that not a concern that this scheme will increase speculation in real estate due to lower holding rates and taxes?
A. If it is beneficial for the investor, market forces would take care of it. Should this aspect be also driven by a capital gains regime? What we have to see is okay there has to be a balance between tax being made simple or the areas in which the tax should govern or influence. We have to choose, there has to be a trade off. So in the case of property, perhaps this (asset bubble) may not be there, but ultimately we'll see how things shape up.   End

 

Edited by Vandana Hingorani

 

 

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