When PM Narendra Modi had flagged the misuse of long term capital gains tax at a Securities Exchange Board of India (SEBI) event last year, it made market participants nervous of losing the tax benefit.

The fear comes back as the regulator is contemplating on withdrawing capital gains benefit for stocks held for more than one year as more 11,000 cases of penny stock trading abuse have come to light.

The Income Tax department has also been involved in these matters and Sebi has shared the data of the latest development as well as sent a new list of entities that had allegedly taken undue advantage of the capital tax gains provisions to avoid paying taxes worth Rs 34,000 crore, reports Business Standard.

Sebi is cracking the whip on companies that are misusing the advantage of not paying long-term capital gains taxes. In its probe, the market regulator had found that 11,000 firms had purchased shares of more than Rs 5 lakh each in the last three years in listed companies that might have been sitting idle with no business operations.

“From the transaction details provided, it appears these entities have misused the stock market for evading taxes and possibly even for laundering money,” said an IT official to the paper.

What is the capital gains tax benefit?

When market participants invest in listed companies that have paid the securities transaction tax (STT) then they do not have to pay long-term capital gains tax on profits earned after selling of shares of the entity. However, the investment should be for more than 12 months.

What are penny stocks?

These stocks trade outside of the major market exchanges at a relatively low price and have small market capitalisation.

What did PM say about LTCG?

In December 2016, Modi had pointed out that market participants did not pay their fair share of taxes.

“Low or zero tax rate is given to certain types of financial income. We should consider methods for increasing it in a fair, efficient and transparent way,” he had added.

What did Budget 2017 propose on LTCG?

Although no change was proposed regarding long-term capital gains taxes in the Finance Bill 2017, but the fine print highlights the proposal of amending the Income Tax Act, 1961, Section 10 to provide that “any income arising from the transfer of a long-term capital asset, being an equity share in a company shall not be exempted, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004”. #casansaar (Business Standard - MoneyControl)