Capital Gain Tax 9 oo Chapter objectives: Computation of capital gain Transactions not considered transfer Exemptions Tax rates Capital gain tax in India Percentage deed value Capital gain tax by size of property Capital gain tax on shares Capital gain tax is payable by an assessee on any profits and gains arising from the transfer of capital assets. Capital asset w/s 2(15) of the IT Ordinance 1984 means property of any kind held by an assessee excluding consumable stores or raw materials in his business, and personal effects like jewelry, wearing apparel, furniture, vehicles which are held exclusively for personal use and are not used by the business or profession. Transactions not considered as transfer of capital assets i, Gift ii. Any transfer of a capital asset by a company to its subsidiaries iii, Any transfer of a capital asset by a subsidiary to the holding company iv. Any transfer of a capital asset in a merger vy. Conversion of bond into equity . Conversion of partnerships into companies <.Advanced Issues in Taxat, lon 110 ains (ws 32) ion of capital g: ; Computation (cost price + improvements + Selling Value of the consideration — expense) Tax rate (provision 2 of The Second Schedule) ies: 15% of capital gain . / Seana and partnership ordinary rates subject to a maximum of 15% Exemptions w/s 32 (5) 1. Capital gain used for procuring another new asset for the business or profession. In such a case no depreciation is allowed for the new asset and when it is sold its cost and WDV will be considered nil, that is the entire sale price will be capital gain. 2. Sale or transfer of capital assets for setting up a new industry and the capital gain is used as equity. 3. In India, there are instruments like capital gain bonds, in which the profit arising from the sale of a property can be invested. These have a lock-in period of three years and the maximum limit for investing in such instruments is Rs 50 lakhs. These bonds are currently being issued by NHAI and REC. If the entire amount of long term capital gains is invested in these bonds, the tax is fully exempted. Investments of any lesser amount will grant a Proportional deduction. The money can be withdrawn after three years, Capital Loss w/s 40 Capital loss can . ; capital gain, °° St OFF and carried forward for six years against | | Capital Gain Tax in India Cost inflation ides s | 1). tae ce Available in the Indian tax law (Lakhotia 1998: \ Of acquisition’ ‘indexed cost of acquisition’ iseo capital Gain Tax . ysed for computation of capital gain. Likewise, ‘indexed cost of improvement” is calculated. ‘The government publishes index’ from time to time, In Ireland, the purcl pst inflation ¢ price, cost of acquisition, and costs of improvement can be adjusted for inflation from 6 April 1974 up to 31 December 2002, and a table is published by Revenue for the purpose of calculating, this adjustment, The jnflation adjustment can only operate to reduce a gain; it cannot increase a loss or turn a gain into a loss, Indexed cost of acquisition = cost of acquisition x (cost inflation index in current year/cost of inflation index in the base year) Percentage of Deed Value Since there is no provision for inflation index in our IT Ordinance or Rules, acquisition cost is not used in practice for computing capital gain. Rather 4% of deed value or TK30000 to TK1.08 million per 1.65 decimal area depending upon the location is taken for determining capital gain on transfer of land and other establishments (Rule 17-11). The higher of the two values is taken as the capital gain, Capital gain is the sale proceeds of the assct mentioned in the deed with the registration office and capital gain tax is 4% of such gain (u/s 53 H), and this is the final settlement, that is, there will be no more capital gain tax imposed on this asset at the time of final assessment. Capital gain tax based on size of the property, that is, the rates per 1.65 decimal area have not been used so far because it is relatively difficult to hide the size of the asset than the market price and the deed value. Therefore the deed value is used and during 2012-13, NBR collected TK10.28 billion as advance capital gain tax (and also final settlement) which is 0.08% of GDP. Capital gain tax is 0.6% of GDP in other developing countries and 2.1% of GDP in OECD countries (Slack 2013), Capital Gain on Shares In case of transfer of shares, capital gain tax of 5% to 10% is charged on the difference between transfer value and cost of acquisition (u/sin Advanced Issues in Taxation shareholder is an individual (ws 53M, 530, 54) 50) ered e js a company the rate applicable to the Comy when the sharehol es Officer of a company holding Tra ding Rj ly (ne oe fate (TREC) shall collect this tax from the ee Entitlement Certificate (TRE ae Stock hange or the bank or merchant bank maint aining ACCOUNE of an em of shares. For sponsor shareholders and directors the rate ig five percent to be paid to the Securities and Exchange Commission (ws 53 M). And for shareholders of stock exchanges, the tax Tate ig 15% to be collected by the Principal Officer of the exchange (u/s 53 N). There are however, other provisions (w/s 64 (2) and Para 27 of Part B of the 6" Schedule of the IT Ordinance which are inconsistent with the above laws. It provides that advance tax (TDS) will not be collected from ‘agricultural income’ and ‘capital gains’. Thus capital gain tax on shares is virtually exempt. Only TK54 million (TK5,4 crores) were collected from the sponsor shareholders u/s 53M (NBR Annual Report 2013-14). This is almost 0% of GDP whereas in UK capital gain tax on shares was BPS3.32 billion which was 0.18% of GDP during 2015-16. In Indonesia, capital gain tax rate is 5% of sale proceeds, in Jamaica it is 7.5%, in India it is 20% of the difference between sale price and acquisition price adjusted for inflation, it Short Tem and Long Term Capital Gains Capital gains tax is definitely an aspect which every property seller should consider in a cost-sensitive market, In India, the sale of a Property involves short-term capital Sains tax if it was sold before the completion of three years of purchase. The tax authorities will consider the profit you generated by the property sale as regular income for that year and apply tax accordingly. If the property was oid afer thee yers ofits purchase having elapsed, long-term cpl eee th Fate of 20 percent. When it comes to Jong-term capital at oveurs when you sell a house after a period of three yea" ‘on involves what is known as indexation. The acquisition cost\ an capital Gain Tax asset i ecantated ase on indexation, which factors inflation i ing the Cost Inflation Index, 13 of th its calculation by usi Are Capital Gains Tax Rates Lower? ‘The answer is yes and no. It is yes when individua fall in the 20% and above tax slabs, However, most of the taxpayers fall in the 10% or 15% slabs and therefore for them capital gain tax is not lower than personal tax rates as is generally considered. Rich and Wealthy Capital gains are income and should be taxed like other forms of income. It’s that simple. The preferential tax rates on capital gains mean that many upper-income people pay lower tax rates than others with lower incomes and that capital and effort are wasted in the search for tax shelters. To start with, lightly taxing capital gains undermines the progressivity of the income tax because capital gains are exceptionally concentrated among the highest-income taxpayers. In 2012, the 400 highest-income taxpayers received a whopping 12% of all capital gains. For this “fortunate 400,” capital gains made up 57% of their income. Even among the merely rich—those with incomes over $1 million—capital gains made up nearly a third of income, compared with only 1% for those with incomes under $200,000 (The Wall Street Journal, March 1, 2015). Earnings Management A corporation's capital gain is affected by selectively dispose of assets which have substantially depreciated or appreciated in value, Investments generally qualify as capital assets; thus, a sale of investments would affect the firm's capital gains. A firm's sale of property, plant and equipment would affect the firm's Capital gain. Discontinued operations and extraordinary items also might affect the firm's capital gain because these events might include Capital assets, numerous items. A firm canAdvanced Issues in Tayey, 114 on Example Mr. X sold 1 for TK25 million. It brokerage “4 percent of s il TK15 million, stam be 80000. Mr. X invested the sale proceeds for another lang ae factory in Tongi, in 2016 cost being TK6 million including all incidental costs. Mr. X duly informed the DCT his intention to take the advantage of tax exemption (roll over) u/s 5. : it Tejgoan industrial area j al land situated at in 2915 0 decim incurred advertisement cost TKS0000 and paig f sale price. The acquisition cost of the Property p duty being TK2 lacs and legal cost Compute (i) capital gain and tax u/s 31, (ii) capital gain tax at 4% of deed value, (ii) capital gain tax at TK60000 per 1.65 decimal area, (iv) capital gain tax based on cost inflation index of 110 in 2015 and 100 in 2010. Solution (i) Capital gain and tax w/s 31 Sale price TK25 m Less advertisement TKO.05 m Brokerage 14% of 25m 0.125 we (0.175) Net sale proceeds 24,83 Less cost of acquisition 15m Stamps 0.2 Legal fees 0.08 ——— (15.28) Capital gain 9.55 Reinvestment (6) Capital gain assessed 3.55 Tax at 15% (i) Capital gain and vax oe Gd Capital gun a by deed value at 4% of 3.55 0.14 Civ) Capital pain ana ha at TK0.06m x (10/1.65) 0.36 y index © Net sale pri cn 24,83Capital Gain Tax ls Inflation adjusted cost 15.28 (110/100) (16.81) Capital gain 8.02 Tax at 15% 12 Question 1. Why gain on sale of shares is exempt (ws 64-2 and 6" Schedule Para 27 of Part B)? Compare our laws with other countries’ tax of this source of income. 2. Differentiate the law and the practice of computing capital gain tax on land and property. 3. Is the acquisition price of land and property u/s 32 used in practice for determining capital gain tax? 4, Are the laws for capital gain on shares complied with in practice? Explain. 5 How is capital gain tax on land and property determined in India? 6. Capital gain tax of 10% and 15% are considered lower than income tax. Is it really so? Explain. 7. What are short term and long term capital gains? How are short term and long term capital gains taxed in India? 8. Who are the real gainers of lower capital gain tax? How? 9. How does capital gain tax affect earnings management? Exercise 1. Mr. Z sold an apartment situated at Green Road, Dhaka in 2012 for TK20 million. It incurred advertisement cost TK30000 and paid brokerage 1/3” percent of sale price. The acquisition cost of the property in 2010 was TK15 million, stamp duty being TK1.5 lacs and legal cost being TK70000. Mr. X invested the sale proceeds for another apartment in Gulshan, Dhaka in 2013 at cost being TK 35million including all incidental costs. Mr. X duly informed the DCT his intention to take the advantage of tax exemption (roll over) ws 5.Advanced Issues in Tay 116 ion «» -anital gain and tax ws 31, (ii) capital gain tax at go, Coon agen gain tax at TK240000 per 1.65 decimal ea deed van ain tax based on cost inflation index of 111 in 2012 4.4 (iv) eat) Shall Mr. Z roll over or pay capital gain tax? sh, 100 in 2010, the amount of capital gain tax exempted i ints: are calculations [Hints: comp’ ae eal : and forgone depreciation on new investment t0 the extent of capita gain (vi) tax written down value of the new investment [Hints: cost of new investment less investment of capital gain]. 2. Mr. M purchased land and building at Dhanmondi in Dhaka in 2004 for TK25 million. He added some improvements in 2008 for TK10 million, He sold the entire property in 2009 for TkKp million. Compute (i) capital gain and tax u/s 31, (Ci) capital gain tax at 4% of deed value, (iii) capital gain tax at TK240000 per 1,65 decimal area, (iv) capital gain tax based on cost inflation index of 150 in 2009 and 100 in 2004, (v) Shall Mr. Z roll over or pay capital gain tax? Show calculations [Hints: compare the amount of capital gain tax exempted and forgone depreciation on new investment to the extent of capital gain (vi) tax written down value of the new investment (Hints: cost of new investment less investment of capital gain).