Beneficial tax rates have been established for income derived from the sale of listed equity shares under the current capital gains taxation scheme. Even the holding time of shares by equity investors, which determines the appropriate tax rates, differs between listed and unregistered shares.
Gains on listed shares are deemed long-term if held for more than a year and are taxed at a reduced rate of 11.96%. Unlisted share gains, on the other hand, are deemed long-term if held for more than 24 months and are taxed at a rate of 23.92 percent. Short-term gains on listed stocks are taxed at 17.94%, whereas profits on unlisted stocks are taxed at corresponding slab rates.
This mismatch influences the expansion of India’s private equity markets, driving a bigger investor community to participate in the listed market, which offers more liquidity and lower tax costs.
It should also be mentioned that the relevant tax rate for non-resident investors investing in long-term unlisted shares in India is limited to 10%, which is the same as the tax rate for listed shares. Rates for resident investors should be decreased as well to provide a level playing field.
The Finance Ministry addressed the problem of differential surcharge rates on long-term capital gains in the case of listed and unlisted stocks in Budget 2022 by restricting the surcharge rate on long-term capital gains to 15%.
Previously, only the surcharge rate on long-term capital gains on listed equity shares was limited to 15%. Long-term gains on unlisted shares, on the other hand, were subject to a surcharge of up to 37% in the event of individual taxpayers with an annual total income of more than Rs 5 crore.
The abovementioned modification provided relief to High-Net-Worth Individuals, notably those investing in start-ups, and also provides a significant push to investments made by fund investors. Budget 2022, on the other hand, did not address the differences in tax rates and holding periods between listed and unlisted shares, allowing the potential for inequity for private equity investors.
Bringing unlisted shares into tax parity would result in immediate development for the start-up industry, which has long been a priority for the government.
Because the fund business mostly invests in unlisted markets, the PE/VC sector would also witness significant expansion. This would imply a larger pool of private money for fund managers, and hence more funding for early-stage firms.
It cannot be argued that India’s existing capital gains tax regime is extremely complicated in terms of differences in taxing depending on different asset classes, holding time, availability of indexation advantages, computation technique, and so on and that it requires a thorough review.
With Budget 2023 approaching, it is believed that the tax authorities would examine revamping the capital gains tax regime to make it simpler and more consistent. A simplified approach is likely to be adopted in which any profits on stocks held for more than 12 months would be considered long-term and taxed at a rate of 10% without any sophisticated computation criteria. Short-term profits on assets held for less than a year should be taxed at a reduced rate of 15%.
Another possibility is that tax rates on dividend income will be reduced. Following the repeal of the dividend distribution tax, dividend income is now taxable in the hands of shareholders at slab rates, with the surcharge rate capped at 15%. This results in an effective tax rate of up to 35.88%. Non-residents have their dividend income taxed at a reduced rate of 20% or less, depending on tax treaties, resulting in a significant difference in the relevant tax rates for residents and non-resident investors.
Given the global economy’s slide into recession, Budget 2023 is likely to be a taxpayer-friendly budget. Rationalization of capital gains tax rates and simplicity of the computation process might increase the country’s investments and growth.