Measures for Development of Capital Market

It is proposed to exempt the income of a unit holder received from UTI or from Mutual Fund. This exemption would be similar to the exemption in respect of dividends received from domestic companies.

It is also proposed to introduce a levy at the flat rate of tax at ten per cent. On the income distributed by the Unit Trust of India and Mutual Funds by inserting a new Chapter XII-E. However, income distributed under the US-64 scheme, and other open-ended equity oriented scheme of UTI and Mutual Funds would be exempt from the levy of this tax for a period of three financial years starting from 1.4.1999. This tax would be payable by the UTI or Mutual Funds.

Consequential amendments are also proposed in certain other provisions of the Income-tax Act. These include proposals to amend,-

1. section 10 (23D) of the Income-tax Act so as to provide that the exemption in respect in income of a Mutual Fund shall be subject to the provisions of the newly inserted Chapter XII-E of the Income-tax Act,;
2. Section 80-L of the Income-tax Act so as to provide that the exemption in respect of investment on certain securities, dividends, etc. is proposed to be amendment so as to exclude the income received in respect of Units from Unit Trust of India and Mutual Funds.
3. The provisions for deduction of tax at source are also proposed to be suitably amended.

The proposed amendments will take effect from 1st June, 1999, and will accordingly, apply in relation to assessment year 2000-2001 and subsequent years.

Reduction of tax rate on long term capital gains in regard to shares and securities

Under the existing provisions, long term capital gains are taxed at the rate of 20% after giving the benefit of cost inflation index. However, certain categories of non-residents and non resident Indians are required to pay tax at the rate of 10% on long term capital gains on securities and specified assets respectively. However, the benefit of cost inflation index is not available to them. Nonetheless this has led to a widespread demand for level playing field between non-residents and resident investors in share market, notwithstanding the availability of cost inflation index to the latter.

Therefore, it is proposed to limit the tax on long term capital gains at 10% of the capital gain on securities as defined in section 2 (h) of Securities Contracts (Regulation) Act, 1956 and listed in recognised stock exchanges in India before allowing adjustment for cost inflation index for all assessees. In other words, the benefit of cost inflation index shall continue as before but where the tax on long term capital gains exceeds 10% of capital gains, such excess shall be ignored.

The amendment will take effect from 1st day of April, 2000 and will accordingly apply to 2000-2001 and subsequent years.

Clarification of tax issues relating to buy-back of shares

The promulgation of the Companies (Amendment) Ordinance, 1998 has inserted section 77A in the Companies Act, 1956 which allows a company to purchase its own shares subject to certain conditions. The shares bought back have to be extinguished and physically destroyed and the company is precluded from making any further issue of securities within a period of 24 months from such buy-back.

The above newly introduced provisions of buy-back of shares has thrown open certain issues in relation to the existing provisions of Income-tax Act. The two principal issues are whether it would give rise to deemed dividend under section 2 (22) of the Income-tax Act and whether any capital gains would arise in the hands of the shareholder. The legal position on both the issues are far from clear and settled and there is apprehension that there will be unnecessary litigation unless the issues are clarified with finality.

It is, therefore, proposed to amend clause (22) of section 2 of the Income-tax Act by inserting a new clause to provide that dividend does not include any payment made by a company on purchase of its own shares in accordance with the provisions contained in section 77 of the Companies Act, 1956. It is also proposed in insert a new section, namely, section 46A to provide that any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares or other specified securities to the extent of the difference between the cost of acquisition and value of consideration so received, subject to provisions of section 48, shall be deemed to be the capital gains.

The proposed amendment will take effect from 1st April, 2000 and will, accordingly, apply in relation to the assessment year 2000-2001 and subsequent years.