Type: Prelims Only

Several States, including some governed by the Centre urged to rein in its reliance on raising revenues through cesses and surcharges which reduce their share in the divisible pool of taxes.

What are Cesses and Surcharges?

The Union government has the authority to collect money through a variety of levies referred to as a tax, fee, cess, and surcharge.

(A) Cess

• Cess is charged on the tax amount and is levied for a specific purpose.
• In India, cess is applicable to all the taxpayers, and it is calculated over, and above the base tax liability of the taxpayer, cess taxes initially go to the consolidated fund of India (CFI) that has to be used for the purpose for which it was collected.
• Education Cess, Swachh Bharat Cess

(B) Surcharge

• The surcharge is levied on the tax payable and not on the total income.
• It directly goes to the CFI, and after that it can be used for any purpose, just like the normal tax.
• Surcharge applies to the taxpayer whose income is more than Rs 50 lakh.
• In simple terms, surcharge is a tax on tax that is not collected for any particular cause, and the union government may use the proceeds of surcharges for any purpose it sees as important.
• The objective behind the surcharge is to put a high tax burden on people with high incomes.

Difference between the two

• The rate of cess under income tax is fixed at 4%, whereas the rate of surcharges varies from 10%, 15%, 25% & 37% based on the taxpayers’ total income.
• Cess is calculated on total tax and surcharge amount; surcharge is calculated on total tax amount only.
• In a nutshell, while both are taxes, cess is collected from every taxpayer to meet a certain purpose, and the surcharge is an additional tax collected from the taxpayers who have higher slab income.

Key difference over which states dispute

• Major difference is that each can be shared with the state government, the surcharge can be kept with CFI, and it can be utilised for other taxes.
• However, cess should be utilised for a particular reason. This restricts the states expenditure.
• Tamil Nadu noted that the share of cesses and surcharges had grown from 10.4% of gross tax revenue in 2011-12 to 26.7% in 2021-22.
• This has deprived the States of their legitimate share of revenue collected by the Union Government.

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The Finance Ministry is looking at rationalizing long-term capital gains tax structure by bringing parity between similar asset classes and revising the base year for computing indexation benefits.

What is Capital Gains Tax?

• Capital gains tax is levied on the profits made on investments (Base Year: 2001).
• It covers real estate, gold, stocks, mutual funds, and various other financial and non-financial assets.

• Under the Income Tax Act, gains from sale of capital assets — both movable and immovable — are subject to ‘capital gains tax’.

Types of CGT

(A) STCG (Short-term capital asset)

• An asset held for a period of 36 months or less is a short-term capital asset.
• The criteria is 24 months for immovable properties such as land, building and house property from FY 2017-18.
• For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as a long-term capital gain, provided that property is sold after 31st March 2017.
• The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc.

Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). These assets are:

1. Equity or preference shares in a company listed on a recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

(B)  LTCG (Long-term capital asset )

• An asset held for more than 36 months is a long-term capital asset.
• They will be classified as a long-term capital asset if held for more than 36 months as earlier.
• Capital assets such as land, building and house property shall be considered as long-term capital asset if the owner holds it for a period of 24 months or more (from FY 2017-18).

Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as long-term capital asset.

1. Equity or preference shares in a company listed on a recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

Why is it so complicated?

Capital gains tax is complicated for a few primary reasons.

• First, the rate changes from asset to asset. LTCG tax on stocks and equity mutual funds is 10% but on debt mutual funds is 20% with indexation.
• Second, holding period changes from asset to asset. The holding period for LTCG tax is two years in real estate, one year for stocks, and three years for debt mutual funds and gold.
• Third, exemptions available against it come with their own complex conditions. For instance, buying a house after selling one can get you an exemption, but the new house must be bought in two years or built in three years of the sale.

Stipulated reforms by Finance Ministry

• Currently, shares held for more than one year attract a 10% tax on long-term capital gains.
• Gains arising from sale of immovable property and unlisted shares held for more than 2 years and debt instruments and jewellery held for over 3 years attract 20% long-term capital gains tax.
• Also, a change in base year for computing inflation-adjusted capital gains is being contemplated.
• The index year for capital gains tax calculation is revised periodically to make it more relevant. The last revision took place in 2017 when the base year was updated to 2001.
• Since the prices of assets increase over time, the indexation is used to arrive at the inflation-adjusted purchasing price of assets to compute long-term capital gains for the purpose of taxation.

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