Need to remove uncertainty over exemption

12:34 PM
The existing restriction in exemption is clearly an attempt to prevent home owners from fully enjoying the benefits.

Even as the Indian markets are avidly awaiting the Central budget for 2008-09, one fervently hopes that it expands the scope for investment in infrastructure and development of domestic capital markets with appropriate fiscal measures.

A fiscal area crying for attention is the capital gains tax, which has had a chequered history in this country. Introduced in 1946, it was scrapped in 1948, only to be resurrected in 1956 by Prof. Nicholas Kaldor as part of his tax reform package for India that included wealth, expenditure and gift taxes, mounted on a steeply progressive taxation platform.

The treatment of long-term capital gains (LTCG) has been a contentious issue in recent years. Section 54EC of the Income-tax Act, 1961, exempts from taxation capital gains arising from the transfer of a long term capital asset, provided the assessee invests the whole or part of the capital gains in long term specified assets for three years.
Dearth of bonds

The Finance Act of 2007 restricted the eligible bonds for such investment to those issued by the National Highway Authority of India (NHAI) and the Rural Electrification Corporation (REC). For the first time, the Act also set a limit of Rs. 50 lakh for investment in the long term specified asset by an assessee during any financial year. At present there are no longer any new debt issues except the REC-Series VII 5.5 per cent bond, which is close to reaching its limit of Rs. 6,500 crore for the year, far ahead of the closing date of March 31, 2008.

There is an urgent need to eliminate the uncertainty by making the legislation on exemption permanent for at least the next ten years or so and ensuring the availability of debt instruments so that development activities are not held hostage to the vagaries of annual budgets.
Low investment limit

There are good reasons to consider withdrawal of the limit altogether or substantially increase it to permit reinvestment of capital gains in infrastructure and rural development.

The limit of Rs. 50 lakh seems arbitrary and minuscule against the backdrop of soaring property values. Urban land values have increased 6,000 times in the last 40 years from about 83 paise to Rs. 5,000 and more per sq. ft.

The CBDT’s Cost Inflation Index and guideline values starting from 1981 provide for only a partial offset to the land price inflation spiral. Such restriction of exemption is clearly an attempt to prevent home owners from fully enjoying the benefits of exemption. The limit virtually turns off the tap of bonds available for investment.
Private castles

Infrastructure development has not been keeping pace with private property development. We see the emergence of private castles in the midst of public squalor. Gated communities with the most ultra modern facilities are developing fast with no decent public roads to connect them.

By increasing the scope and size of investments in specified bonds, the Government will help in partially reducing the glaring disparity between urban and rural areas, and facilitate harmonious growth of private lands with adequate infrastructure.

There is a strong incentive to undervalue property transactions, as a market value transaction is subject to LTCG tax at 20 per cent. The buyers encourage undervaluation, as they too escape the stamp duty of 9 per cent payable on registration. Such artificial limits on investment run counter to official attempts to bridge the gap between the market value and registered value of properties. They further help to extend the reach of unaccounted and black money.

The pernicious effect of such restrictions is seen in the sickening display of ostentatious spending, untrammelled luxury imports and unproductive expenditure on gold and jewellery, in turn sustaining and widening the underground economy and the gap between the rich and the poor.
An opportunity

On the positive side, the Government has wisely crafted a transparent capital gains tax exemption scheme via NABARD, REC and NHAI bonds. Despite their inadequacies, one hopes the new Finance Act renews and increases these fiscal policy devices for infrastructure transformation. This is fiscally prudent, encouraging private financing of infrastructure developments, eliminating reliance on direct taxation.

The Rural Electrification Corporation, for example, has already accelerated the growth and enrichment of quality of life of rural and semi-urban population, especially in Gujarat. It has financed projects covering power generation, conservation, transmission and distribution network in the country. In the five years ended March 31, 2006, its loan sanctions had tripled to Rs. 18,771 crore, and its net profit more than doubled to Rs. 63 crore.
A tax exempt bond market?

The Government needs to consider a series of infrastructure bonds to cater to the investor appetite in this area. The issuance of bonds for various tenors with appropriate interest rates under the purview of Section 54EC of the Income-tax Act will partially help in the development of a tax exempt bond market with a yield curve stretching from spot to longer term tenors.

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