GS3 PYQ (Mains Answer Writing): Budget | Indian Economy for UPSC CSE PDF Download

Comment on the important changes introduced in respect of the Long term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019. (MAINS UPSC GS3 )

The Union Budget of 2018-19 introduced the following two important changes:

• Dividend Distribution Tax (DDT) Dividend is the return given by a company to its shareholders out of profits earned by the company in a particular year. Dividend constitutes income in the hands of the shareholders which ideally should be subject to income tax. However, the income tax laws in India provides for an exemption of dividend income received from Indian companies in the hands of the investors by levying a tax called the DDT on the company paying dividend.
• Long Term Capital Tax  - Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit is considered as income and hence charged to tax in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be short-term or long-term. Capital gains are 
• The long-term capital gains tax existed until 2005 but was removed to encourage greater participation in the equity markets. Though it did have its intended effect but it also had the side-effect of business surpluses being invested in financial assets due to attractive return on investments. This benefitted corporates primarily and also created a bias against investing in manufacturing. It has also led to significant erosion in the tax base resulting in revenue loss. not applicable when an asset is inherited because there is no sale.

Budget-2018:

Budget has proposed introduction of DDT in case of equity mutual funds.  

• It has proposed an introduction of tax on distributed income by equity-oriented mutual funds at the rate of 10 percent, to provide a level field across growth oriented and dividend distributing schemes.  
• DDT will reduce the in-hand return to investor, if the dividend option is opted for. Dividend, however, remains tax-free in the hands of the investor. The fund houses will have to deduct DDT before distributing dividend. Budget 2018 proposes to change how LTCG on equity shares and units of equity-oriented MFs are taxed. 
• Now, tax has to be paid for capital gains on stock which are sold after holding it for over 1 year. 
• The LTCG tax on the sale of shares listed on the stock exchange after long-term holding is taxable at 10% of the capital gain (exceeding Rs 1 lakh). 
• Up to Rs 1 lakhs, the long-term capital gain is exempted from taxation.

Topics covered - Changes in Budget Regarding LTCG and DDT