The Union Budget for the fiscal year 2018-2019 brought forth significant alterations in the taxation landscape, particularly about Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT). One of the most noteworthy changes was the re-introduction of the Long-term Capital Gains Tax on equity investments, a move that marked a departure from the previous regime where such gains were exempt. Under the new provisions, gains exceeding Rs. 1 lakh from the sale of equity shares or units of equity-oriented mutual funds became subject to a 10% tax. Additionally, the budget abolished the Dividend Distribution Tax, shifting the tax burden from companies to individual shareholders. This transformative shift aimed to align the taxation of dividends with the classical system, wherein dividends were to be taxed as per the individual’s applicable income tax slab. These changes sparked debates and discussions within the financial community, influencing investment strategies and reshaping the dynamics of capital markets.
Tag: Government budgeting.
Decoding the Question:
- In the Introduction, write the definitions of Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT).
- In Body,
- Discuss changes introduced in LCGT and DDT in the Union Budget 2018-19.
- Further, the rationale or merit expected with the move can be discussed.
- Concluding our answer by giving the final comment over the step.
Answer:
Under the Seventh Schedule of the Constitution, the Union Government is empowered to levy taxes on income other than that from agriculture such as Corporation Tax, Income Tax, Fringe Benefit Tax, Capital Gains Tax (CGT) and Dividend Distribution Tax (DDT).
Long-term Capital Gains Tax: A capital gains tax is a tax on the growth in value of investments incurred when individuals and corporations sell those investments. A profit from the sale of a capital asset is known as capital gains.
- The tax does not apply to unsold investments.
- When an asset is held for 36 months or more, it is treated as a “Long-Term” Capital Gain (LCGT).
- Shares and equity mutual funds alone enjoy a special dispensation which is, holding a period of 12 months or more qualifies as long-term in this case.
Dividend Distribution Tax: It is a tax levied on dividends that a company pays to its shareholders out of its profits. The Dividend Distribution Tax is taxable at source and is deducted at the time of the company distributing dividends.
The Union Budget of 2018-19 introduced the following two important changes:
- Long-Term Capital Gains Tax (LTCGT): Reintroduction of a 10% tax on long-term capital gains arising from the transfer of listed equity shares.
- Dividend Distribution Tax (DDT): Introduction of a 10% tax on distributed income by equity-oriented mutual funds.
Merits of changes in LCGT:
- The long-term capital gains tax existed until 2005 but was removed to encourage greater participation in the equity markets. Though it did have its intended effect, it also had the side-effect of business surpluses being invested in financial assets due to attractive returns on investments.
- This benefitted corporations primarily and also created a bias against investing in manufacturing. It has also led to significant erosion in the tax base resulting in revenue loss.
- Keeping in mind the points mentioned above, the decision to bring back long-term capital gains tax on listed equities holds merit.
- Moreover, LTCG on unlisted shares are currently taxed – LTCG on listed shares ends the advantage enjoyed by the latter, bringing them on par.
Merits of changes in DDT:
- The tax on distributed income by equity-oriented mutual funds will level the playing field across growth-oriented funds (where the dividend is reinvested back into stocks) and dividend-distributing funds (investors receive regular income through dividends).
- Up until now, dividends from equity-oriented funds were tax-free and were also exempt from paying the DDT.
Conclusion
However, these changes should also be followed by abolishing or reducing the securities transaction tax rates (levied on all transactions made on the stock exchanges), which could lead to double taxation if continued. Thus, the changes in LCGT and DDT are made by the government to augment its revenue resources. Another important aim behind this is reducing tax avoidance of unscrupulous companies.
In case you still have your doubts, contact us on 9811333901.
For UPSC Prelims Resources, Click here
For Daily Updates and Study Material:
Join our Telegram Channel – Edukemy for IAS
- 1. Learn through Videos – here
- 2. Be Exam Ready by Practicing Daily MCQs – here
- 3. Daily Newsletter – Get all your Current Affairs Covered – here
- 4. Mains Answer Writing Practice – here
