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Changes in respect of capital gains

What are the changes proposed in the Finance Bill, 2007, in respect of capital gains?

Definition of capital asset with effect from April 1, 2007 (assessment year 2007-08) will now include works of art, so that even sale of such works of art by a person not in the business of dealing in them would be liable for tax on capital gains. These were, hitherto, considered as personal assets. The works of art will include archaeological collections, drawings, paintings and sculpture.

The other amendment in respect of capital gains tax relates to reinvestment benefit under Section 54EC. The bonds eligible for the benefit for AY 2007-08 were notified late and were subject to the limitations placed on the size of the bonds to be issued and the ceiling of Rs. 50 lakh by subscribers.

The power of the Central Government to fix the ceiling was the subject matter of considerable criticism on the ground that it extended beyond the power available for subordinate legislation. It was also felt that such mid-term restrictions imposed after the transaction entered in anticipation of the relief was not justified even as a matter of State policy. But then, the Finance Bill, 2007 is content to regularise, what was admittedly beyond the jurisdiction of the notifications with retrospective effect from April 1, 2006 and in vesting the power with the Government in future to prescribe such limits. This makes the prospect of benefit of Sec. 54EC extremely uncertain.

Capital gains tax is badly in need of reform. The rate of tax at 20 per cent was fixed at a time, when the general rate was 50 per cent and more. The benefit of indexation of April 1, 1981 has not undergone any change notwithstanding the steep inflation over the years.

Reinvestment benefits are also saddled with conditions or as in respect of Sec. 54EC are unavailable.

It is time, that there is reform, so as to conform to the professed vertical and horizontal equity in taxation as in many other provisions in the statute.

S. RAJARATNAM

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