The budget had sought to tax only incremental LTCG. However, the manner in which the amendment bought in was complex.
Mumbai: Taxation issues continue to dog holders of bonus shares. Investors are unable to avail of the grand-fathering benefits on gains accrued till January 31, 2018 to escape the retroactive tax.
In the last year’s budget, the government withdrew long-term capital gains (LTCG) tax exemption and introduced a 10 per cent tax. However, with a view to avoid any retroactive tax, it sought to provide grand-fathering of the gains accrued to the tax payer till January 31, 2018. This meant that gains made on investments prior to the date would get the LTCG benefit.
The budget had sought to tax only incremental LTCG. However, the manner in which the amendment bought in was complex. The original cost of acquisition was sought to be substituted with the updated cost of acquisition, which was to be arrived at as prescribed.
However, the formula to calculate the gains is flawed as far as the bonus shares are concerned. Investors who have received bonus shares from hundreds of companies over the past few years will be subject to the higher tax outgo, experts said.
Consider a situation where a company had declared a 1:1 bonus and the ex-date for such share was November 2, 2018 and the shareholder opted to sell the shares on November 10. The price would obviously correct in the market on November 2 from Rs 140 to Rs 70. But now he realised that he made a long-term capital loss (LTCL) on the original shares of Rs 10 and made a short-term capital gain (STCG) of Rs 70. He ends up paying tax at 15 per cent on such STCG.
LTCL under the current set-off rules cannot be set off against STCG and therefore he has no choice but to carry that forward.
According to rules, the cost of acquisition in relation to a long-term capital asset, (equity share, or a mutual fund unit) acquired before the 1st day of February 2018 shall be higher of the following: (i) the cost of acquisition of such asset; and (ii) lower of - (A) the fair market value of such asset; and (B) the full value of consideration received or accruing as a result of the transfer of the capital asset.
What the formula in substance did was to protect the original cost of acquisition at all times. If the price prevailing in the market as on January 31, 2018 was higher than the original cost, that price could be considered subject to the sale price not being lower than the January 31, 2018 price. If the sale price was lower than the January 31, 2018 price, the sale price would be deemed to be the cost of acquisition. If however, the sale price was lower than the original cost of acquisition, then the original cost of acquisition would be considered.
"The anomaly on taxation of bonus shares needs to be addressed. One solution may be to apportion the cost of the original shares across bonus shares. So instead of considering nil cost for bonus shares, some cost can be considered. This has been the industry ask as well. Alternatively, long-term capital loss, at the tax payer's option, should be allowed to be set off against short-term capital gain. The change in the set-off provision may at least partly address the situation" said Suresh Swamy, Partner – Financial Services, PwC.