Subject: Economy

The Union Budget 2018-19 introduced significant reforms in capital gains taxation and dividend distribution, marking a shift towards a more transparent and equitable tax regime.

Key Changes in Long Term Capital Gains Tax (LCGT)

• Introduction of 10% tax on LTCG exceeding ₹1 lakh from sale of listed equity shares and equity-oriented mutual funds.

• Implementation of grandfathering provision to protect gains made until January 31, 2018, ensuring fair transition and market stability.

• Removal of Securities Transaction Tax (STT) exemption on LTCG, ending the previous dual benefit system.

• Introduction of indexation benefits to adjust the purchase price according to inflation, providing relief to long-term investors.

Changes in Dividend Distribution Tax (DDT)

• Abolition of DDT regime where companies were liable to pay tax on dividend distribution.

• Shift to classical system of taxation where dividends are taxed in the hands of shareholders at their applicable income tax rates.

• Introduction of Tax Deducted at Source (TDS) on dividend payments exceeding ₹5,000 annually.

• Removal of additional tax of 10% on dividend income exceeding ₹10 lakh for resident individuals.

Impact and Implications

• Enhanced tax revenue mobilization through broadening of the tax base.

• Improved market efficiency by removing the cascading effect of dividend taxation.

• Increased foreign investment attractiveness due to simplified tax structure and international compatibility.

• Better alignment with global practices of dividend taxation, making Indian markets more competitive.

The reforms in LCGT and DDT represent a significant step towards creating a more transparent and efficient tax ecosystem. These changes have helped in achieving the twin objectives of revenue generation and market development, while aligning with international best practices like those followed in OECD countries.