Professional Documents
Culture Documents
(2) Should gains which are non-recurrent and casual be taxed as income ?
The argument that capital gains do not constitute income as they
are non-recurrent a^d casual is not correct. It may be noted that although
irregular, they do increase taxable capacity of the tax-payer. When pos-
session of wealth, even if it yields no income, increases such capacity and
is, therefore, taxed, capital gains which reflect increased flow of income,
would also increase their taxable capacity and should be taxed.
against the tax-payer with a given income which contained no, or only a
small, element of capital gains, compared with the tax-payer with the same
total income which contained a large capital gain element."5 While dealing
with the issue, Cutt observed :
[I]f such gains remain untaxed or are taxed at sufficiently lower
rates, effectiveness of progressive taxation as a means of reduc-
ing inequalities of income would be seriously curtailed.6
It is also said that tax on capital gains hampers the free mobility
of capital and thereby disturbs the equilibrating adjustments in a dyna-
mic economy, But it is not always that the capital shifts from one sector
to another purely due to the economic and social adjustments. The shift-
ing may be guided by speculative propensity. These speculative trans-
actions need to be curbed and capital gains taxation is one ofthe means to
achieve it.
Moreover, capital gains taxation has a stabilising effect on the eco-
nomy. With the existence of provision for carry forward of capital loss,
such inequity of discrimination against fluctuating income would be avoided
to a large extent. That is the reason why most of the countries which
tax capital gains have provision for carrying forward the capital losses.
Further, under a progressive tax system without averaging, this tax would
substantially enhance the built-in-flexibility of the income-tax system in
that it would withdraw into the exchequer much larger funds from active
circulation in a period of upswing than during the recession or depression.
This point has also been advocated by Head7 who emphasises not only the
contribution of this tax to automatic stability but also the role of such taxa-
tion in discretionary stabilisation policy in booms sustained by capital
gains in real estates and stock values.
one anna in the rupee (6.25 per cent) on capital gains upto Rs. 50,000 to
five anna (31,25 per cent) in the rupee on gains above Rs. 10 lakhs. In
the case of companies the tax was not to be charged if the amount of capital
gains did not exceed Rs. 15,000. But where the gains exceeded this amount
the whole of it was taxed. The rate of tax for companies was the ordi-
nary income-tax rate applicable to them. In order to remove the appre-
hension that "losses claimed may exceed the profits declared," 9 it was
provided that capital loss could be set-off only against capital gain and such
loss could be carried forward for six years only if it exceeded Rs, 15.000
in any year for non-corporate tax-payers.
Although imposition of tax on capital gains was justified, it was abolish-
ed in the year 1949 on account of its unpopularity, low yield of revenue
and adverse effect on the investment and movement of capital. While
explaining its abolition, the finance minister stated in his budget speech
that "its psychological effect on investment has, however, been markedly
adverse and it has had the effect of hampering the free movement of stocks
and shares without which it is hardly possible to maintain a high level of
industrial development".10
In the year 1955, Kaldor was invited to recommend tax reforms after
studying the existing system of taxation in India. While commenting on
the reasons for withdrawal of capital gains tax in 1949, he stated:
[T]hese arguments did not justify the withdrawal of the tax
so soon. The yield of the tax of Rs. 60 million for the two
years related to 1824 assessments only. It is not clear how the
Government could have had the information or experience at its
disposal to be able to conclude that the tax had important ad-
verse effects on investment, or hindered the interchange of secu-
rities. There is also a logical contradiction involved in arguing
both that the tax has only a negligible yield, and at the same
time has important adverse repercussions on the economy.11
Kaldor held that capital gains were beneficial receipts forming part
of the surplus in the hands of individuals and could be used by them for
consumption as well as investment, thus adding to their taxable capacity.
He further observed that taxation of such gains would not only ensure
horizontal equity, but also help in plugging one of the well known loop-
holes of tax avoidance. Commenting on the system of levying additional
tax on companies on their undistributed profits, he pointed out:
9. Ibid.
10. Finance Minister's Budget Speech, Government of Tndia, (1949-50),
11. Nicholas Kaldor, supra note 3*
142 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 30 : 2
12. Ibid.
1988] TAXATION OF CAPITAL GAINS 143
and concessions, once allowed, should continue for a long period of time,
unless the circumstances warrant their earlier withdrawal, so that tax-payers
may take full advantage.
Generally changes in the various provisions are made through the
Annual Finance Bills. As the Finance Bill is not referred to the Select
Committee and members of Parliament do not have adequate opportunity
of studying the various provisions, total effect of the amendments cannot
be ascertained, since at times they are made retrospectively merely to get
around an adverse decision of the Supreme Court.
With a view to having an effective and stable tax structure, frequent
changes in the law should be avoided and an attempt made not to amend
the law for at least five years. Changes through the annual Finance Bill
should be restricted to procedural matters. Other amendments in tax
laws should be made through separate bills after a careful survey of their
effect. For this, the impact of various provisions should be evaluated
periodically with the help of reliable statistical data. In other words some
empirical study should be made before introducing or withdrawing any
provision. At present, in the absence of such scientific study, changes
in the laws are dependent upon the political climate and whims of finance
ministers rather than rational economic considerations. Therefore to
make an objective analysis which could form the basis of informed deci-
sions for the purposes of changing the law, continuous in-depth studies
should be made on various issues. These would then be less inflenced
by extraneous considerations. For making such research studies, ade-
quate or reliable statistical data should be made available. It is hoped
that the use of computer (as envisaged in the Seventh Five Year Plan and
as announced by the finance minister in the long term fiscal policy), will
certainly accelerate the flow of data from the field which will provide for
its appropriate storage and retrieval.
It is also desirable that the laws should be redrafted in a way which
will make them intelligible at least to a reasonably educated person willing
to make some effort. Use of archaisms and idiomatic expressions should
be avoided as far as possible.
A stable and fair structure will definitely lead to better tax compli-
ance and promote the confidence of the tax-payer in the administration.
Therefore, the whole scheme of capital gains taxation needs to be reviewed
in totality with all its concessions and exemptions re-examined, if this is
done, and as mentioned above no changes made for at least a five-year
period, most of the administrative problems will nearly disappear.
Ill Essential features and legal framework : latest reforms
Any profits or gains arising from the transfer of a capital asset are
taxed under the head 'capital gains'. 120
\2a. The substantive provisions relating to the computation of income chargeable
under this head of income are contained in sections 45 to 55A of part F, ch, IV, Income-
tax Act 1961,
144 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 30 : 2
12b. For details of period of holding in some of the other countries, see appendix-
1988] TAXATION OF CAPITAL GAINS 145
Balancing charge, on the other hand, represents the excess of sale price
of the capital asset over its written down value. The adjustment is done
with reference to the actual balancing charge. In case no such balancing
charge is actually levied, the written down value is taken to be the cost of
acquisition.
As regards any asset acquired before ] April 1974, the tax-payer has
the option of adopting the fair market value of the asset as on that date.
In such a case, the cost of acquisition is taken, at the option of the tax-
payer, to be the fair market value of the asset on the said date, as reduced
by the amount of depreciation, if any, allowed after the said date and as
adjusted. In certain countries like, Belgium, Brazil, Colombia, Mexico
and Taiwan, there are provisions for indexation of assets or the gains.
Similar provisions are worth studying for their introduction in India. Alter-
natively, the option for substituting the cost of acquisition of asset by the
fair market value may be considered to be allowed not on a fixed date but
on a moving date, i.e., the first day ofthe financial year ten years back from
year in which the asset is transferred. This will reduce the harmful effects
of inflation and bunching of realised gains in one year without the need
for too many amendments.
Capital gains arising out of the transfer of property used for residence
is exempt from tax in the case of an individual tax-payer provided he has
acquired another residential house for his residence within a stipulated
period and the value of his new house is equal to or more than the quantum
of capital gains. Thus if a dwelling house is sold for Rs. 1,00,000, mak-
ing a gain of Rs. 25,000 and a new house valued at Rs. 25,000 is acquired,
no capital gains tax is payable by the seller.
The entire capital gain is exempt if it arises on transfer of a residential
house, (being a Jong-term asset) the income of which is chargeable under
the head 'income from house property', if its full sale consideration does
not exceed Rs. 2,00,000. Where it exceeds this sum, only a propor-
tionate amount of capital gains is exempt. This exemption is available only
if the individual tax-payer has on the date of sale of the house no other
residential house. In Canada and the UK one residential house is totally
exempt from capital gains tax. Besides, capital gain arising on sale of any
long-term capital asset other than residential house is also exempt provi-
ded the net consideration is invested in acquiring a residential house.
This exemption was introduced recently to encourage construction of resi-
dential buildings, the shortage of which has been felt in all cities, big and
small. These concessions are fully justified to avoid any hardship that
would accrue as a result of increasing cost of house construction and in-
crease in prices of lands and buildings. The exemptions have also been
extended to Hindu undivided families with effect from 1 April 1987.
Similar provisions apply where a tax-payer transfers agricultural
land and within two years buys new land which is also used for agricul-
tural purposes. This exemption is applicable to agricultural land situated
within eight kilometers from the municipal limits. Other agricultural
lands are by definition excluded from capital assets.
Further no capital gains tax is levied in the case of compulsory acqui-
sition of lands and buildings of an industrial undertaking for the purpose
of shifting or re-establishing the said undertaking or setting up of another
industrial undertaking if the market value of the new land or building is
not less than the capital gains arising out of the transfer.
With a view to encouraging investment in particular channels, a
provision was introduced in 1977 providing for total relief from capital
gains tax if the net consideration (on net capital gains alone) was invested
in certain approved forms of financial assets for a stipulated period. Pre-
sently, these approved investments include, the securities of the Central
Government, special series of units of Unit Trust of India, National Rural
Development Bonds, debentures issued by Housing and Urban Development
Corporation Ltd. (HUDCO) and notified bonds issued by public sector
companies. Under this scheme of exemption, the tax-payer is debarred
from obtaining any loan or advance on the security of these deposits. He
148 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 30 : 2
has provided for scaling down of long-term capital loss (in the same manner
as deductions are allowed out of long-term capital gains) for the purposes
of set-off and carry forward. The losses scaled down in this manner will
be deemed as business losses. The new provisions are applicable in rela-
tion to the assessment year 1988-89 and subsequent years.
IV Certain legal issues and review of judical pronouncements
(i) Meaning of capital asset
Section 2(14) of the Income-tax Act 1961 defines "capital asset"
which includes property of every kind held by a tax-payer whether or not
connected with his business. However, certain items have been specifically
excluded from the definition. These include, (/) the stock in trade, con-
sumable stores, or raw materials held for the purpose of the tax-payer's
business or profession; 07) Gold Bonds issued by the Central Government
to augment the government's resources drained by the Indo-Chinese war
of 1962 as well as Indo-Pakistan war of 1965; (Hi) the Special Bearer Bonds
1991, issued to mop up black money in the economy; (iv) all personal effects
held for personal use of the tax-payer or any member of his family depen-
dent on him;13 and (v) the agricultural land situated in India outside the
urban areas.13"
The Income-tax Act does not define the expression "agricultural
land". However, the courts have laid down various factors to be consi-
dered for the purposes of determining whether a plot of land is to be treated
as "agricultural land" or not. These, inter alia, include, (/) whether assess-
ment of land is subject to land revenue; (ii) whether agricultural operations
are carried on the land; 077) whether the land is capable of agricul-
tural operations; and (iv) what is the character of the adjoining lands and
its description in the official records.
The Madras High Court in Beverly Estate Ltd. v. C.I.T.Ub held that
shade trees standing on tea estates do not constitute agricultural land and
thus come within the definition of capital asset. Hence it does not mean
that everything attached to the land is treated as agricultural land.
It, therefore, follows that capital asset includes all kinds of property,
13. However, capital gain arising on personal jewellery was subjected to tax with
effect from 1 April 1973.
13tf. Upto 1970 agricultural land in India did not constitute a capital asset and
any transfer thereof did not attract capital gains tax. However, it was noticed that many
land-holders in urban areas carried out some agricultural activity on their land befoie
selling it. Huge profits made on the sale of such land escaped capital gains tax. To
prevent this mode of avoidance, the Finance Act 1970 taxed capital gains arising on trans-
fer of agricultural land. If such land is situated, (a) within the jurisdiction of a munici-
pality or a cantonment board; or (b) in an area having a population of ten thousand
or more, or (c) within eight kilometers or the local limits of any municipality or canton-
ment.
13b. (1979) 117 I.T.R. 302.
150 JOURNAL OF THE INDIAN LA W INSTITUTE [Vol. 30 : 2
20. Mangabre Electric Supply Co. Ltd. v. C.LT,, (1978) 113 LT.R. 655.
21. (1964) 57 I.T.R. m.
152 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 30 : 2
gains until the year when the actual sale deed is executed. Meanwhile the
seller might have spent the money and may no longer be in a position to
pay the taxes.
With a view to preventing evasion of capital gains tax by resorting
to the above types of transactions, the Finance Act 1987 made an amend-
ment in the definition of "transfer" to include even those cases where physi-
cal possession of immoveable property is handed over to the purchaser
or when interest in a property is transferred and funds in lieu thereof are
received by its owner. In other words, the meaning of "transfer" giver
under section 53A of the Transfer of Property Act, will not be adopted foi
purposes ofthe Income-tax Act. This will make the gain taxable when the
property passes hands or when interest in a property is transferred and no1
when it is registered many years later.
The second and more difficult condition to invoke section 52(1) is that
the burden of proving that certain sales were effected with the object of
avoidance or reduction of tax on capital gains is on the Revenue. It is
not enough that the explanation offered by the tax-payer is not accepted
by the assessing officer, and that, there is a strong suspicion as to the real
motive which prompted him to sell the assets. There must be something
more positive (than mere suspicion) to suggest that sales were effected with
the object of avoidance or reduction of liability for capital gains.23 It was
held in another case24 that it is not enough if the reduction of tax liability is
the effect or result of the transfer, the important consideration is the basic
objective of the transfer and not the result.
Assuming that the conditions for invoking section 52(1) are satisfied,
the assessing officer is empowered to take the full value ofthe consideration
as the fair market value of the capital asset on the date of transfer, reject
the consideration declared by the tax-payer aitd compute the capital gains
accordingly.
As regards sub-section (2) of section 52, the condition required for
invoking this provision is that there must be a difference of 15 per cent or
more between the fair market value of the asset (on the date of transfer)
and the consideration declared by the tax-payer. It empowers the assessing
officer to compute the amount of capital gains arising on the transfer of
a capital asset with reference to its fair market value as on the date of its
transfer, if in his opinion such value exceeds 15 per cent of the full
consideration as declared by the tax-payer.
There was a controversy on the point whether for invoking the pro-
visions of section 52(2) of the Act, the tax-payer must be shown to have
actually received more than what is declared or disclosed by him as consi-
deration. There were two schools of thought, namely, (/') that the burden
of proof is on the Revenue to prove that this had been done; and (ii) that
once it established that the fair market value is more than the declared
consideration by more than 15 per cent, the provision of section 52(2) shall
become applicable and the assessing officer is not bound to prove that in
fact more money has been paid for the transfer than declared or disclosed
by him. The controversy was set at rest by the Supreme Court ruling
in K.F. Varghese v. I.T.O?h where the first view was upheld. The court
held:
malpractices. There are quite a few instances where the fair market value
determined by the cell is lower than the valuation declared by the tax-payer
or in the alternative, so much higher that they cannot be sustained when
challenged in courts.
The Economic Administrative Reforms Commission26 while dealing
with the problem of valuation has recommended in its report submitted in
December 1983 the establishment of valuation tribunals presided over by a
High Court judge and assisted by two experts, to which disputes relating
to valuation may be referred. If satisfied, the tribunal, after hearing the
parties concerned, and on perusal ofthe evidence, that in fact a larger consi-
deration has been received than what has been recorded, may order the
difference to be taxed as capital gains and authorise levy of suitable penalty
for concealment.
The commission further recommended that if9 on the contrary, the
tribunal finds no evidence but still comes to a finding that the price recorded
is below the fair market value, it may treat the difference as chargeable to
gift-tax. Where it finds that such value exceeds the recorded value by 25
per cent, the tax-payer should be deemed to have concealed the gift and
subjected to penalties accordingly. This recommendation, it seems, is
under serious consideration of the government.
Gne motive that influences understatement of consideration for trans-
fer of immoveable property is the heavy burden of stamp duty which is
generally borne by the purchasers. Stamp duty is administered by the
state government whereas the capital gains tax is levied by the Central
Government. Perhaps an agreement can be arrived at between them where-
by rates of stamp duty can be reduced. The state governments can be
suitably compensated for the tax lost. This would remove an inducement
for this fraudulent practice.
VI Principles of taxation and capital gains tax in India
While tax policy of any economy aims at achieving a number of objec-
tives such as raising of revenue, payment for goods and services provided
collectively through state, serving as an instrument of social policy, the
principles of taxation, i.e., equity, ability to pay, stability, certainty, etc.,
are very closely related to these considerations.
(1) Equity
A good system should be horizontally equitable, i.e., it should treat
like with like. A modern tax system must be so constructed as to be capable
of use for vertical redistribution between rich and poor.27 Kaldor recom-
mended levy of capital gains tax as a means of checking concentration of
wealth in a few hands.28 Capital gains accrue only to those who own pro-
perty and failure to tax the gains would discriminate in favour of property
owners and perpetuate severe inequalities in income and wealth.29 Income
in the form of capital gains is an important factor in aggravating economic
inequality. It is not fair that the exchequer should get a proportion of
those incomes when realised in the form of capital gains. The main argu-
ment for a capital gains tax is to meet the inequality which results when
some people can transpose taxable income into untaxed capital gains.
(3) Efficiency
Another principle of taxation is 'efficiency'. Generally it is under-
stood that a tax system is inefficient in so far as it distorts the free choices
of the individual. A tax which reduces the supply of labour because it
distorts the choice between work and leisure is inefficient in this sense.
Similarly, a commodity tax which distorts the pattern of consumption is
also inefficient. This is the principle of least price distortion; that tax A is
more efficient than tax B if, for an equal revenue to the exchequer, it involves
less loss of satisfaction to the tax-payer. In other words, efficient tax system
is that which causes least excess burden or welfare loss.
According to Kaldor,31 the purpose of an efficient tax is to restrain
private expenditure. As capital gain accrues to wealth holders whose
marginal propensity to consume is less than that ofthe poorer people, econo-
mic efficiency of capital gains tax from the above viewpoint is lower than
(4) Flexibility
(5) Certainty
Certainty is a principle in the tax system which v>e are apt to take
for granted; that the individual's tax liability should not be arbitrary and
should be calculable in advance; retrospective legislation may infringe this
principle. It contributes significantly to voluntary tax compliance and
reduces compliance costs.
(6) Simplicity
APPENDIX
Taxation of capital gains
in some of the countries
Argentina
Taxed as ordinary income.
Australia
Generally no capital gains tax but gains derived from the sale of assets, e.g., real
estate or securities purchased with the intention to res 11 at a profit and sold within twelve
months of purchase are treated as assessable income.
Austria
Taxed as ordinary income. Profits from the sale of assets may be deducted from
the book value of newly purchased assets (to be owned for at least seven yeais in the
case of movables and fifteen years in the case of immoveables).
Belgium
Companies : Taxed at the rate of 22.5 per cent of the gain on the sale of property
held for more than five years. Otherwise gains included in income. Gains exempt pro-
vided the proceeds are reinvested in qualifying assets in Belgium within a peiiod of
three years. Capital loss can be set off against ordinary income regardless of the
period for which the asset was held.
In case of mergers, exempt if, (0 all transfers to the new company are exchanged
for capital stock; (//) if no tax free distributions of capital were made by old company;
and (Hi) the surviving company's principal place is in Belgium.
Individuals : The rate is 16.5 per cent if property held for five to eight years. If
sold before five yeais the rate is 33 pei cent. No tax on gains if property held for more
than eight years.
Capital gain is computed by incieasing the purchase price by 5 pet cent for each
year the land was held and subtracting the total from the selling price.
Special tax treatment in the case of securities.
Brazil
Resident companies : Taxed as ordinary income.
Resident individuals : 15 per cent gains on the sale of real estate and securities pro-
vided there are three or more ieal estate transactions in a year.
Non-resident individuals or legal entities : Gains on sale of securities at the time of
repatriation of the investment in foreign cuncncy with the Cential Bank, subject to 15
per cent withholding tax.
Canada
Companies : 50 pei cent of gains taxed as ordinary income. Provision for deduc-
tion of 50 per cent of capital losses from the taxable gains. Excess capital losses may be
carried back one year or forward indefinitely but to be deducted only against capital
gains.
Individuals : Gains from sale of a principal residence are exempt. Cumulative
tax exemption of capital gains up to a lifetime limit of C$ 500,000. To be phased in
over a peiiod of six years with a cumulative limit of C$ 25,000 in 1986 rising to
C$500,000 in 1991.
Chile
Taxed as ordinary income (unless otherwise exempted).
160 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 30 : 2
Colombia
Companies : Gains on sale of tangible fixed assets, taxed as ordinary income.
Companies allowed to declare capital assets at their estimated market value at year end
and to adjust this figure by the official COL index. Gains on sale of fixed assets exempt
if 80 per cent of such gain reinvested for expansion or capitalisation, the acquisition of
fixed assets in industrial or agricultural projects or for stock subscriptions and new issues.
Remaining 20 per cent to be invested in 8 per cent IFI Bonds. Exemption also
allowed if 100 per cent of gains invested in IFI Bonds within the year the capital gains
are realised.
Individuals : Taxed as ordinary income.
Ecuador
Taxed as ordinary income with the following deductions :
(/) Gains from the sale of land may be reduced by 10 per cent for each year held.
(//) Gains on depreciable assets (sale price less book value) are reduced by 50 per
cent.
(7/7) Gains on certain security transactions are subject to a single tax of 8 per cent.
Egypt
Taxed as ordmaiy income.
Finland
Companies : Gains realised on sale of business assets and machinery- taxed as
ordinary income. However, exempt if gains transferred to repurchasing reserve and
used within two years to purchase machinery and equipment and within three years
to purchase land. Exempt if land has been held for ten years and securities for five years.
The tax is set at 20 per cent of the gross sale price.
Individuals : Taxed as ordinary income. A deduction of Fm 1 million allowed
with 20 per cent rate of tax on the gain.
France
Companies : Net short-term gains over short-term losses on assets held for less than
two years taxed at normal corporation tax rate. The payment can be spread over three
years. A net short-term loss can be deducted from regular income. But the gains on
sale of quoted shares are taxed at a rate of 15 per cent.
Long-term gains on assets held for more than two years taxed at the rate of 15 per
cent (25 per cent in the case of land). If the gains are distributed the rate of 35 per
cent (25 per cent in the case of land) unless distribution occurs when the company is
liquidated. Long-term losses may be deducted from long-term gains and may be carried
forward for ten years but may not be deducted from ordinarv income, except for liqui-
dation.
Individuals : Short-term gains on the moveable property (held for less than one
year), land and building (held for less than two years) taxed as ordinary income.
Long-term gains, i.e., gains from the property held for more than two years, are adjusted
for inflation and then reduced for an annual percentage for each year beyond the second,
e.g., 3.33 per cent for land and 5 per cent for buildings. One fifth of the gain is taxed
as income, and the tax thus computed is multiplied by five.
Germany (Federal Republic)
Companies : All realised gains and speculative gains on business assets
taxed at normal corporation tax rates. Gains exempt if, (/) the assets have a
useful life of at least 25 years; (77). they have been held by the selling company
1988] TAXATION OF CAPITAL GAINS 161
for at least six years; and (//7) the proceeds arc reinvested in other specified assets within
Germany.
Gains from the sale of non-business assets are not taxable, provided assets are
held long enough so that the gain is not considered speculative (e.g., two years for real
estate and six months for securities). Losses are not deductible.
Individuals : Exempt if property held long enough not to be considered specula-
tive (e.g., six months for securities, two years for real estate).
Greece
Companies : Gains on transfer of both tangible and intangible assets are exempt
up to Dr. 1 million. 30 per cent rate applies above this amount. Exemption from tax
on gains if reinvested within two vcais.
Hong Kong
No tax on capital gains.
Indonesia
Companies : Gains realised on the ^aie of capital equipment 'axed as ordinary
income while capital losses are deductible Gains realised on the sale of shares arc exempt
to the companies selling shares to the public.
Gains realised while a company is enjoying a tax holiday arc subject to corporate
taxes at normal rates.
Israel
Gains realised on the sale of any fixed asset to the extent that the profits reflects the
increase in the cost of living between the dates of acquisition and sale, taxed at the rate
of 61 per cent for companies and the normal rate for individuals. The total tax not to
exceed 50 per cent of the taxable gain.
Gains on the sale of securities listed on Ta! Aviv Stock Exchange or bonds issued
or guaranteed by the government are exempt from tax.
Gains resulting from merger of industrial companies are also exempt.
Italy
Companies : Taxed as ordinary income. Exempt if credited to a special fund and
invested in depreciable assets within two accounting periods.
Individuals : Gains on sale of immoveable property arc subject to local tax.
Japan
Companies : Generally taxed as ordinary income. But gains from land sales
are taxed at additional 20 per cent surtax if the company holds the land less
than ten years.
Individuals : Taxable income from capital gains is calculated as follows:
(/) General rule : First divide capital gains between short-term and long-term
gain. The period of holding is five years for long-term gain. Then cost and expenses
are deducted from short-term gain and from long-term gains. Out of this Y 500,000
are allowed to be deducted as basic exemption from short term gain and remainder is
deductible from the long-term gain. Taxable income i\ net short-term gain and 50
per cent net long-term gain.
(//) Special rule : Capital gains from sale or transfer of land and building are
taxed separately from other income. In the case of the tax-payer owning land and
building for more than ten years, tax rate is generally ?0 per cent. In other cases tax rate
is 40 per cent.
Capital gains from sale of shares are generally exempt.
162 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 30 : 2
Korea
Companies : Gains realised from the sale of land, buildings and other assets taxed
at a rate of 40 per cent and gains from small houses at a rate of 30 per cent. Gains
from sale of houses and land within two years of acquisition are subject to a 50 per
cent tax. Additional 20 per cent surtax on gains realised from transfer of land. Gains
resulting from mergers exempt.
Individuals : Gains on sale of primary residence is exempt unless the same is sold
within six months of acquisition.
Kenya
Companies : Capital gains tax was suspended in the 1985 Budget to encourage
more floating of corporate securities.
Individuals : Taxed on 25 per cent on any capital gains made after 1 January 1982,
at their normal income-tax rates but only up to a maximum of 35 per cent. (For assets
acquired before 1975 and disposed of before 1985, the tax is reduced according to a
complex formula).
Luxembourg
Companies : Taxed as ordinary income. Gains from the sale of buildings or of
non-depreciable assets that have been held for at least five years may not be taxable if,
(i) written off against the value of other assets acquired in the same tax year; or (ii) are
used to purchase any asset within two years.
Individuals : Gains derived from sale of real estate held for more than two years
and other property held for more than six months are subject to lower rate of tax. Other-
wise taxed as ordinary income.
Mexico
Taxed as ordinary income. Tax rebate given on gains resulting from the sale of
real estate in case of shifting of the firm from Mexico City to certain zones specified for
development. A formula to adjust asset values to reflect inflation applies in case of sale
of land, buildings, shares of stock and other capital interests which varies according
to the number of years the asset is held.
Gains resulting from the sale of publicly traded stock by individuals are tax exempt.
Netherlands
Companies : Taxed as ordinary income. Gains realised as a result of corporate
mergers exempt.
Individuals : Gains on the sale of shares exempt in the hands of individual share-
holders holding less than one-third of a corporation's shares. Otherwise taxed at
the rate of 20-54 per cent with a provision of ad hoc relief in case of merger approved
by the Finance Ministry.
New Zealand
Generally exempt—taxed where the asset was purchased with the aim of reselling
it at a profit. Gains on the sale ofpatent rights taxed as ordinary income but may be
spread over six years.
Nigeria
Taxed at the rate of 20 per cent. Capital losses may not be set off against capital
gains unless the assets are sold together without specifying the sale value of individual
items.
1988] TAXATION OF CAPITAL GAINS 163
Norway
Companies: Gains on sale of land and immoveable assets taxed as ordinary income.
Exempt if reinvested within four years in other property. The four years period may be
extended on application.
Special rate of 10 per cent applies to sale of land to public authorities.
Gains on mergers taxable provided approved by tax authorities considered being
beneficial to the community.
Individuals : 30 per cent capital gains tax on profits arising from the sale of secu-
rities held for less than two years with a provision of setting-off the capital loss.
Pakistan
Companies : Gains realised on capital assets held less than a >ear taxed as ordinary
income. Gains realised on capital assets held for more than a vear taxed at 25 per cent.
Gains on sale of shares of public companies arc exempt until 30 June 1989.
Individuals : Gains realised on capital assets held less than a year taxed as ordinary
income.
Gains realised on capital assets held for moie than a >ear are subject to deduc-
tion of 60 per cent or Rs. 5,000, whichever is greater.
Panama
Companies : Special tax treatment of gains on sale of real property. Following
deductions are allowed from the gains : (i) the original acquisition cost; (ii) expenses
related to sale of the property; (Hi) an allowance of 10 percent of the original acquisi-
tion cost for each year the property was held by the seller; and (/v) the cost of any
improvements not included in the original purchase price or acquisition cost.
Individuals : Gains from sale of stocks, bonds and other securities—taxed as ordi-
nary income. Stock of companies registered with the National Securities Commission
and which has at least 25 per cent of its total assets invested in Panama, the gains are
exempt.
Peru
Taxed as oidinary income.
Philippines
Companies : Taxed as ordinary income.
Individuals : The net capital gains from the sale or disposition of real property are
subject to tax of 10-20 per cent.
Capital losses allowed to be deducted to the extent that they off-set capital gains
and a one year loss carry forward is allowed.
Portugal
Companies : Gains on sale of land taxed at 24 per cent. Other gains on sale of
fixed assets, securities rights, other property taxed at 12 per cent. In addition 15
per cent surtax is charged. Gains on mergers considered to be of national interest may be
reduced or waived. Gains on sale of shares not held with the purpose of exercising
control are exempt.
Puerto Rico
Companies : Gains realised from land held less than two years and other assets held
164 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 30 : 2
six months or less—taxed as ordinary income For assets held longer, corporations
report the entire amount, but if the tax on gains from these assets exceeds 25 per
cent, then an alternate method is used that limits the tax of 25 per cent.
Individuals : Gains realised from land held Jess than two years and other assets held
six months or less taxed as ordinary income. For assets held longer (other than land)
individuals report up to 40 per cent of the gains in their taxable income with a maximum
tax of 25 per cent.
For lands held for two years or longer, option to declare 40 to 75 per cent of gains
is taxable income or to pay 40 per cent tax on the gains if the land was held for seven
years or less but more than two years. Over seven years, a 25 per cent tax rate would
apply.
Singapore
No tax.
South Africa
Exempt but the tax-payer to prove that the asset was not acquired with the purpose
of reselling it.
Sweden
Companies and individuals : Gains on transfers of real property taxed as ordinary
income. Gains on sale of securities, 100 per cent taxable if held for less than two years;
40 per cent if sold after two years. Alternatively, the seller can deduct 25 per cent of the
sale value.
Gains on sale of other moveable property are taxed according to a sliding scale,
which ranges from 100 per cent (if the property has been in the seller's possession less
than two years) to no tax at all (after five years).
Gains on sale of a business or part of a business to the companies are exempt if
placed in special replacement reserves to be used within a given period for investment
in the remaining business or a new one in specified circumstances.
Taiwan
Gains on sale of machinery and other fixed assets taxed as ordinary income. Gains
on sale of land taxed under a formula related to the percentage gains over the original
cost under the Land Value Investment Tax Act.
Gains on sale of stocks or bonds exempt.
Thailand
Taxed as ordinary income for companies as well as individuals.
Turkey
Companies : Gains realised from land, building, equipment and shares—taxed as
ordinary income, Gains on sale of land and buildings exempt provided profits were
capitalised in 1984. The exempt percentage is 80 per cent for the year 1985, 1986;
70 per cent for 1987 and 60 per cent for 1988.
Individuals : Gains on the sale of land held more than four years exempt. Gains
on the sale of shares held more than a >ear exempt.
United Kingdom
Capital gain is calculated as the amount by which the proceeds from the sale of
1988] TAXATION OF CAPITAL GAINS 165
asset exceed its original cost with a provision of allowing deduction for inflation as mea-
sured by the retail price index (RPI).
Companies : Trading profits and capital gains aie computed separately. Gains
of all forms of property included in taxable income liable to corporation tax. Capital
losses cannot be set off against trading profits but trading losses may be s&t off against
capital gains arising in the same year. In certain circumstances set-off allowed, in earlier
years. In case of reinvestment of proceeds of sale of land, buildings and plant, within
12 months before or 36 months after the sale the gains are exempt. Gains are
exempt in case of mergers if the shareholders are compensated with stock or bonds
rather than cash, provided the new money continues in the same business.
Individuals : Gains exceeding pounds 6300 of all forms of property taxed at a fiat
rate of 30 per cent. Gains exempt on, (/) sale of owner occupied residences; (it) sale
of gift-edged stock and corporate bonds held over one year; (in) sale of National Savings
Certificate and government issued indexed bonds. Since the capital gains tax is asses-
sed separately from personal income-tax, capital losses cannot be set off against income-
tax liability, but can be carried forward indefinitely to offset future capital gains.
United States
Companies : Taxed as ordinary income. Capital loss cannot be deducted from
ordinary income but can be carried forward for fifteen years or back three years and
deducted from future or past capital gains.
Individuals : Taxed as ordinary income.
Uruguay
Taxed as ordinary income in the case of individual and commercial establishments.
Venezuela
Taxed as ordinary income.