Capital Gains Tax

 

 

Capital Gain tax is a tax imposed on any profits arising out of a sale or transfer of capital asset. A capital gain, or the difference between the money gained from selling the asset and the price paid for it, can also be realized from the sale of an investment which can take the form of a house, a family business or any movable or immovable property having the potential to guarantee a future flow of income.

Capital gain taxes usually occur in the case of sale or transfer of a corporate stock. This leads to a major error while computing capital gains taxes: double taxation on capital formation. Many have argued that capital gain taxes can be questioned over whether they tax the value or yield of an asset. While the present discounted value of an asset or a corporate stock is calculated by taking into account the future flow of income and thus the sales price and hence the capital gain from selling the asset is a function of the future stream of income, capital gains taxes are also applied when the corporate stock actually yields the returns over the future. This has prompted many business analysts to say that optimal taxes on capital gains is zero if we are to avoid the dangerous consequence of double taxation.

Apart from the above mentioned factor which renders the capital gain taxes as detrimental to investment or capital formation, capital gain taxes also has the strange feature of adjusting to inflationary pressures. Capital gains are not indexed to inflation and thus the seller pays tax not only on the gain in purchasing power, but also a tax on an illusory gain attributable to inflation.

Sec. 2(47) of the Indian Income Tax Act, 1961 defines transfer in relation to capital asset as the relinquishment of the asset or extinguishment of the rights therein; it is also applicable being a member of a cooperative society or being a shareholder which bestows the right to enjoy any immovable property.

Capital gain taxes are voluntary in nature, i.e. they are not incurred when there is not any transfer on the movement of property or the seller holds on to his property. In the context of India, any profits or gains arising from the transfer of an asset is subject to “income tax” under “capital gains” which is only partially exempt in certain cases of losses arising out of transfer of capital. This again proves the point of the capital gains tax structure not allowing people to take risks in going for higher investment by selling off his previous property. But the gains arising from transfer or sale of property or capital is totally amenable to capital gains taxes.

There are short and long term capital gains taxes in case of India with equity shares and mutual fund units being subject to short term capital gains taxes if held for a period of 12 months or less and to long term capital gains taxes if held onto for more than that period. Objects such as jewellery and land have a uniform rate of capital gains taxes. Short term capital gains are taxed like any other income and can be nullified by capital losses incurred from the same business. In case of long term capital gains taxes, they are taxed at the rate of 10% to 30% of earnings adjusted for inflation index. It is to be noted in this context that the Cost Inflation Index (CII) climbed from 100 in 1981-82 to 480 in 2004-2005 as per the latest estimates of the Income Tax Department, Department of Revenue under the Ministry of Finance.

France has a flat rate of capital gains at 27% while capital gains taxes do not exist in countries such as Belgium, Singapore and Switzerland. In UK, capital gains are exempt from taxes up to a certain extent. This was raised to 9,200 pounds for the 2007-08 tax year. In UK, individuals pay capital gains taxes based on their highest rates of marginal income taxes which range from 0%, 20% to 40% of the income. But recently, people have been allowed to claim a taper relief which reduces the amount subject to capital gain when such a situation arises depending on whether the asset is a “business” or a “non-business” asset. Companies paying corporation tax cannot claim a taper relief but can claim an indexation allowance to offset the effect of inflation.

In case of the USA, individuals and corporations pay normal income taxes on the net total for all their capital gains, but individuals enjoy lower rates on long-term capital gains (for an asset which has been held over a year) which is not the case for corporate organization. This rate had been fixed at 15% in 2003 which was again settled at 5% for people belonging to the poorest income brackets. Tax rates on eligible dividends and capital gains have been fixed at 0% interest rate for people in 10%-15% income tax brackets for the next three years. The Internal Revenue Service under the Department of Treasury administers the tax structure in the US which also allows scope for deferring capital gains taxes through various planning strategies.

Capital gains taxes while can raise much needed revenue for the national governments are also one of the most debatable due to the reason of a possible double taxation.

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