The changes in the tax structure on the personal and enterprise level was a positive development from the announcements made today by the Finance minister while the introduction of the Long Term Capital Gains tax which was anticipated was not very encouraging from the equity market point of view.
The major highlights about taxation are as follows:-
Long Term Capital Gains Taxation (LTCG)
The Government has introduced tax for long term capital gains exceeding Rs.0.1 million at the rate of 10% without allowing the benefit of any indexation for equities. Also there the Government will introduce a tax on distributed income by equity oriented mutual fund at the rate of 10%.
The total amount of exempted capital gains from listed shares and units was around Rs.3.67 trillion as per returns filed for A.Y.17-18. Major part of this gain has accrued to corporates and LLPs. This according to the finance minister created a bias against manufacturing, leading to more business surpluses being invested in financial assets. There was therefore a strong case for bringing long term capital gains from listed equities in the tax net. However, recognizing the fact that vibrant equity market is essential for economic growth only a modest change is being made.
For example, if an equity share is purchased six months before 31st January, 2018 at Rs.100/- and the highest price quoted on 31st January, 2018 in respect of this share is Rs.120/-, there will be no tax on the gain of Rs.20/- if this share is sold after one year from the date of purchase. However, any gain in excess of Rs.20 earned after 31st January, 2018 will be taxed at 10% if this share is sold after 31st July, 2018. The gains from equity share held up to one year will remain short term capital gain and will continue to be taxed at the rate of 15%.
Micro, Small and Medium Enterprises (MSMEs)
MSMEs that have a turnover of upto Rs.2500 million would have a reduced tax rate of 25% from the current 30% rate.
In the last Union Budget of 2017-8 the Government had announced the reduction of corporate tax rate to 25% for companies whose turnover was less than Rs.500 million in financial year 2015-16. This benefited 96% of the total companies filing tax returns. Towards fulfillment of the promise to reduce corporate tax rate in a phased manner the Government would extend the benefit of this reduced rate of 25% also to companies who have reported turnover up to Rs.2500 million in the financial year 2016-17.
This will benefit the entire class of micro, small and medium enterprises which accounts for almost 99% of companies filing their tax returns. The estimate of revenue forgone due to this measure is Rs.70 billion during the financial year 2018-19. After this, out of about 0.7 million companies filing returns, about 7,000 companies which file returns of income and whose turnover is above Rs.2500 million will remain in 30% slab. The lower corporate income tax rate for 99% of the companies will leave them with higher investible surplus which in turn will create more jobs.
Standard deduction of Rs.40,000/- in lieu of the present exemption in respect of transport allowance and reimbursement of miscellaneous medical expenses.
The Government had made many positive changes in the personal income-tax rate applicable to individuals in the last three years. Therefore there are no changes in the structure of the income tax rates for individuals.
The existing allowed deduction of Rs.19200 for transport allowance and Rs.15000 for medical bills has been done away with a standard deduction of Rs.40000. The net benefit of this would be only to the extent of Rs.5800 (Rs.40000 minus (Rs.15000+Rs.19200)) for salaried tax payers. This would marginally increase the disposable income in the hands of the individual tax payer.