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The man­ner of com­pu­ta­tion the ex­emp­tions avail­able and the rate of tax­a­tion of cap­i­tal gains de­pends upon whether the as­set trans­ferred is a long-term cap­i­tal as­set or a short-term cap­i­tal as­set. An as­set is clas­si­fied as long-term or short-term de­pend­ing upon the pe­riod for which the cap­i­tal as­set was held by the tax­payer be­fore the as­set is trans­ferred by him. Clas­si­fi­ca­tion as a long-term cap­i­tal as­set could make a huge dif­fer­ence to the cap­i­tal gains tax li­a­bil­ity, re­sult­ing in sub­stan­tially lower tax, which is why such ba­sic de­ter­mi­na­tion of clas­si­fi­ca­tion is so im­por­tant.

Till 1998, this clas­si­fi­ca­tion was very sim­ple: if an as­set was held for more than 3 years, it was a long-term cap­i­tal as­set; if it was held for 3 years or less, it was a short-term cap­i­tal as­set. In re­cent years, this clas­si­fi­ca­tion has be­come far more com­pli­cated, with the hold­ing pe­riod for such clas­si­fi­ca­tion dif­fer­ing de­pend­ing upon the type of as­set. Even within a type of as­set, dif­fer­ent pe­ri­ods ap­ply for dif­fer­ent classes within a par­tic­u­lar type.

For shares (eq­uity as well as pref­er­ence), the pe­riod of hold­ing de­pends upon whether the shares are listed or not. For listed shares, the pe­riod is 1 year; for un­listed shares (whether of a pri­vate com­pany or of a pub­lic com­pany) the pe­riod of hold­ing is 2 years.

The pe­riod for clas­si­fi­ca­tion of units of mu­tual funds de­pends upon whether they are eq­uity-ori­ented units or not. In the case of eq­uity-ori­ented units, the pe­riod is 1 year; for other units of mu­tual funds, the pe­riod is 3 years.

For debt se­cu­ri­ties such as deben­tures or bonds or gov­ern­ment se­cu­ri­ties, the fac­tor of list­ing de­ter­mines the re­quired pe­riod of hold­ing. Listed debt se­cu­ri­ties need to be held for more than 1 year to qual­ify as long-term as­sets; other debt se­cu­ri­ties need to be held for more than 3 years to so qual­ify. To that, there is again an ex­cep­tion—zero coupon bonds need to be held for only more than 1 year to qual­ify as long term, even if they are not listed.

For im­mov­able prop­er­ties which are in the na­ture of land or build­ing, the re­quired pe­riod of hold­ing is 2 years. For other in­ter­ests in prop­er­ties, such as ten­ancy rights or a house or build­ing un­der con­struc­tion, the re­quired pe­riod of hold­ing to qual­ify would be 3 years. For all other as­sets, for­tu­nately, the pe­riod is uni­form at 3 years.

De­ter­min­ing whether an as­set is a long-term cap­i­tal as­set or a short-term cap­i­tal as­set should have re­ally been a sim­ple ex­er­cise. With so many per­mu­ta­tions and com­bi­na­tions, it is no won­der that tax­pay­ers often need to con­sult a tax ad­viser to un­der­stand where ex­actly the as­set fits in. Even tax ad­vis­ers need to open their tax law books to check that the ad­vice they are pro­vid­ing on the clas­si­fi­ca­tion is cor­rect.

The com­pli­ca­tions do not end here. Un­der cer­tain cir­cum­stances, such as con­ver­sion of deben­tures into shares or in­her­ited as­sets, de­ter­mi­na­tion of the pe­riod of hold­ing in­volves an ad­di­tional ex­er­cise. One has to en­sure that the trans­ac­tion of ac­qui­si­tion is cov­ered by the pro­vi­sion, which lays down how the pe­riod of hold­ing is to be com­puted un­der cer­tain spec­i­fied cir­cum­stances. For in­stance, there is no clar­ity (with dif­fer­ing de­ci­sions of dif­fer­ent courts) about how to com­pute the pe­riod of hold­ing of a house prop­erty, which was ac­quired when it was un­der con­struc­tion—whether the pe­riod starts from the date of the let­ter of al­lot­ment, the date of sign­ing of the agree­ment, the date of com­ple­tion of con­struc­tion or the date of pos­ses­sion.

This ba­sic de­ter­mi­na­tion of clas­si­fi­ca­tion as long term or short term is just one of the many com­plex­i­ties in com­put­ing cap­i­tal gains tax li­a­bil­i­ties. There are many more issues in com­pu­ta­tion of the gains, the com­pu­ta­tion of the ex­emp­tions and even de­ter­mi­na­tion of the ap­pli­ca­ble rate of tax. It is there­fore no won­der that there is so much lit­i­ga­tion on the sub­ject of cap­i­tal gains. One won­ders whether this ba­sic de­ter­mi­na­tion be­tween long term and short term can­not be sim­pli­fied, to make life eas­ier for tax­pay­ers. This is clearly one of those issues that are cry­ing out for sim­pli­fi­ca­tion.

In to­day’s fast paced times, there is per­haps a need to re­duce the pe­riod in all cases where it is 3 years, to 2 years, as a pe­riod of 2 years would be fairly long enough. One can un­der­stand the need to have an in­cen­tive pro­vi­sion for as­sets such as listed eq­uity shares and other se­cu­ri­ties, and eq­uity ori­ented units of mu­tual funds, where the ob­jec­tive is to pro­mote sav­ings in eq­uity in­stru­ments, and there­fore the pe­riod of hold­ing re­quired would be less than the norm. There could, there­fore, be just two pe­ri­ods pre­scribed for this pur­pose—a pe­riod of 1 year for such eq­uity-re­lated as­sets, and 2 years for all other as­sets.

Such a clas­si­fi­ca­tion would be much sim­pler to un­der­stand, and would re­sult in re­duc­tion of un­nec­es­sary lit­i­ga­tion. Maybe the gov­ern­ment will con­sider the dif­fi­cul­ties faced by a large num­ber of tax­pay­ers who are af­fected, par­tic­u­larly in­di­vid­u­als, and make the nec­es­sary changes in the next Bud­get.

Gautam Nayak is a char­tered ac­coun­tant.


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