Capital Gain Tax Ranjan Kumar Bhowmik vou. Ex-Member National Board of Revenue 1. Capital and Revenue Capital is fund and income is the flow of fund. Similarly, capital is wealth and income is the service of wealth. A stock of wealth existing at a particular point of time is called capital and the flow of services through a period of time is called income. The distinction between capital and revenue is of great importance from the income tax point of view, as tax is levied on income not on capital (except capital gain). A receipt is not taxable when it is referable to fixed capital but it is taxable as @ revenue item when itis referable to circulating capital like stock-in-trade. Circulating capital or stock-in trade is also known as trading asset and fixed capital as fixed asset. An asset may be the capital asset in the hands of one person and a trading asset in the hands of other and the nature of receipt may consequently vary according to the nature of trade in connection with which it arises. The determining factor must be the nature of the trade in which the asset is employed. The land upon which @ manufacturer carries on his business is part of his fixed capital but the land with which a dealer in real-estate carries on his business is part of his circulating capita. 2. Basic principles of capital aai Section 31 of the Income Tax Ordinance 1984 provides that tax shall be payable by an assessee Under the head “capital gain” in respect of any gain arising from the transfer (ie., sale, exchange or relinquishment, etc.) of any capital asset. Such gain shall be deemed to be the income of the income year in which the transfer (ie., sale, exchange, relinquishment, etc.) took place. ‘Any gain arising from the transfer of a capital asset (both movable and immovable) as defined in section 2(15) of ITO,1984 is chargeable to income tax at the rate prescribed at paragraph 2 of the Second Schedule of the Ordinance. Capital Transfer Capital Capital asset gain gain tax {Sale, {Asper +] exchange, --——* [Asper [———* [Asper section relinquishment] sections 31, Para 2 of 208)] 32] ‘Second [As per section Schedule} 21681 Similarly a loss under this section can be claimed only if it is arises from a transfer of a capital asset and not merely because the capital asset becomes valueless or the earnest money paid by the intending purchaser is forfeited erence renner Capital Gain Tax Prepared by Ranjan Kumar Bhowmlk roux Member, NBR as on 21/8/2022 Page i)3. Capital asset A capital gain arises only due to the transfer of capital asset. Capital asset is defined in section 2(15) of ITO 1984 where capital asset means property of any kind held by an assessee, whether OF not connected with his business of profession, but does not include- (a) Any stock-in-trade (not being stocks and shares), consumable stores or raw materials held for the purposes of his business or profession; (©) Personal effects, that is to say, movable property (including wearing apparels, jewellery, furniture, fixture, equipment and vehicles), which are held exclusively for personal use by, and are not used for purposes of the business or profession of the assessee or any member of his family dependent on him; 4, Transfer of Capital Asset Transfer, in relation to a capital asset or part of a capital asset, as per section 2(66) of ITO, 1984 includes the following: (2) sale (b)exchange or (©) relinguishment of the asset, or (@) the extinguishment of any right therein, But it will not include the following: ‘a) Any transfer of the capital asset under a gift, bequest, will or an irrevocable trust; b) Any distribution of the assets of a company to its shareholders on its liquidation; and c) Any distribution of capital assets on the dissolution of a firm or other AOP or on the partition of a HUF. Although the definition of transfer does not include compulsory acquisition of the asset but provision has been made at section 52C for deduction of tax at source from compensation ‘against acquisition of property by the Govt. Assale by the receiver appointed by the Court would be covered by this section. A lease of land ‘would be a transfer but the salami or premium paid for the lease is not to be treated as capital gain rather it would be income under the head ‘income from other sources’ as mentioned at section 19(9). The mere grant of the right of management of a capital asset would not be covered by section 2(66) but it applies even gain arises from the relinquishment of a capital asset. Capital gains may arise in exchange of property. For example, land is given to a real-estate company in exchange of 2 flats q higher price than the cost r ere ‘Capital GainTax Prepared by Ranjan Kumar Bhowmikcrou Ex Member, NBRas on 21/0/2022 PageThe compensation received from an insurance company on the sinking of a ship is not liable to capital gain tax due to the following: (@) When the ship is sunk and lost, itis not possible to say that itis transferred (©) The word transfer as per section 2(66) would include cases in which rights are extinguished either by the assessee himself or by some other agency but not those in which the asset is merely destroyed by a natural calamity (©) The insurance money represents compensation for the pecuniary loss suffered by the ‘assessee and cannot be taken as consideration received as a result of the transfer which is the basis under section 2(66) for computing capital gain. But where a capital asset is destroyed by fire and under the insurance policy the burnt or salvaged property belongs to the insurer, there is a transfer of the original asset in a changed form and the provision of section 2(66) will atract. Foreign currency is like any other commodity and when itis converted into Bangladeshi taka it is virtually a sale of the commodity for a price ‘Therefore, tax is leviable under section 31 on capital gain arises on the conversion (sale) of foreign currency held as a capital asset. 5. Capital gain tax on shareholders when two companies amalgamate In a case where company A amaigamates with and merges into company B and the shareholders of company A are allotted shares in company B, 2 question arises whether those shareholders would be liable to capital gain tax. The answer is no as because capital gain tax would not be payable unless the amalgamation involves sale or exchange or a relinquishment of an asset or the extinguishment of any right. It is clear that amalgamation would not involve any sale or transfer or exchange either. So, there is no question of gain tax. The allotment of shares by a company cannot be regarded as a transfer of property by that company. !f capital gain arises from any transfer of capital asset in a scheme of amalgamation then gain tax will not be applicable as per section 32(5A) of ITO,1984. But if the consideration received by the shareholders of the amalgamating companies in any manner other than the shares of the amalgamated company shall be subject to applicable gain tax. calcul: ital gain from transfer n of Capital gain from transfer of business or undertaking shall be computed after deducting the following from the full value of the consideration: [a] The book value of asset minus liabilities as on the date of transfer. [b] Any expenditure incurred solely in connection with the transfer. Time to rec in Capital gains are assessable as the income of the year in which the transfer takes place even though money may be realised later. For determining the year of chargeabilty, the relevant date is not the date of the agreement to sell but the date of sale, eee Capital GainTax Prepared by Ranlan Kumar Showmik ron Ex Member, NR as on 21/8/2022 Pages @8. Com i ain Section 32 of ITO 1984 lays down the mode of computing capital gain. The amount of capital gain is arrived at by deducting two items from the full value of the consideration for which the transfer is made namely. (a) Any expenditure incurred solely in connection with the transfer, (0) The cost of acquisition of the capital asset; and (c) Any capital expenditure incurred for any improvements thereto. 9. Cost of acquisition The general principle of computing capital gain is to deduct cost of acquisition from the sales price But where it becomes the property of the assessee under a deed of gift, bequest or will or under a transfer on a revocable or irrevocable trust or on any distribution of capital assets on the liquidation of a company or on any distribution of capital assets on the dissolution of a firm or other AOP or the partition of a HUF, the actual cost of acquisition to the previous owner of the capital asset as reduced by the amount of depreciation, if any, allowed to the previous owner, ‘and where the actual cost of acquisition to the previous owner cannot be ascertained, the fair market value at the date on which the capital asset became the property of the previous owner. Proviso to section 32(2) specifically provides that if the asset is one in respect of which the assessee has obtained depreciation allowance in any year, the cost of acquisition is taken to be the WDV as adjusted that means diminished or increased by any balancing allowance or balancing charge under section 19(16) or 19(17) or section 27(1) (i) or section 29(1) (xi). The adjustment is with reference to balancing allowance actually deducted or balancing charge actually levied. If for any reason no such balancing allowance is actually deducted or balancing charge actually levied, the WDV must be taken without any increase or diminution. Where the capital asset became the property of the assessee by succession, inheritance or evolution, the actual cost of acquisition of the capital asset to the assessee shall be the fair market value of the property prevailing at the time the assessee became the owner of such property. 10. Determination of fair market val Where in the opinion of the DCT, the fair market value of a capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than 15% of the value so declared, the fair market value of the capital asset shall, with the previous approval of the NJCT, be determined [section 32(3)] Fair market value is DCT will determine higher than the [——>} value taking consideration by more approval from LCT If DCT determines. thon sew different value than the value stated by the transferor Fair value is higher than Government may the consideration by offer to buy the more than 25% *| capital asset Prepared by Ranjan Kumar Bhowtik ova Ev Member as on 21/6/2022, Paget14. Offer to buy the capital assets by the Government. ‘Where iin the opinion of the DCT, the fair market value of a capital asset transferred by an assessee as on the date of the transfer exceeds the deciared value thereof by more than 25% of ‘such declared value, the Government may offer to buy the said asset in such manner as the NBR may prescribe [section 32(4)] A capital gain arising from transfer of plant, machinery, equipment, motor vehicle, furniture, fixture and computer which immediately before the date on which transfer took place was being used by the assessee for the purposes of is business or profession shall be exempted from payment of the capital gains tax up to the extent and upon fulfilment of the conditions 2s mentioned below: - (@) A new plant, machinery, equipment, motor vehicle, furniture, ficure and computer have to be purchased for the purposes of his business or profession within a period of one year before or after the date of transfer. (b) The declaration shall have to be filed for exemption before the assessment is made. (©) When the capital gain is greater than the cost of the new asset, the capital gains up to the extent of cost of acquisition of the new asset shall be exempted and the balance shall be charged to tax. In determining the depreciation on such asset, cost shall be taken to be nil (4) When the capital gain is equal or less than the cost of the new asset, no tax shall be charged on the capital gain. The time-limit for purchase of the new asset can be extended by the DCT with prior approval of the UCT [Section 32(6)] 13. Some other tax exempted capital gains ‘Some other capital gains are exempted from gain tax. These are - (2) Transfer of capital asset being buildings and lands to a new company: When buildings and lands are transferred to a new company for setting up an industry and the whole amount of capital gain arising out of such transfer is invested in the equity of the said company, then the capital gain shall not be charged to tax in the year of transfer. Section 32(10) (b) Transfer of capital asset of a firm to a new company: When capital gains arise from the transfer of capital asset of a firm to a new company registered under the Companies Act, 1913/1994 and the whole amount of capital gain is invested in the equity of the said company by the partners of the firm, then the capital gain shall not bbe charged to tax in the year of transfer. section 32(11) 14. Tax rate in respect of capital gain Capital gain tax is different from regular tax and is prescribed in Para 2 of Second Schedule of Income Tax Ordinance, 1984 Capital gain in the hands of a company other than the capital gain arising out of disposal of share will be taxed as a biock of income separate from other income of the assessee company at a fiat rate of 18% regardless of the period of holding of the asset from the date of its acquisition If the assessee is other than a company and the asset is transferred before the expiry of five years from the date of its acquisition, the capital gains will be taxed at the usual tax rate applicable to the assessee's total income including the capital gain. If the asset is transferred at any time afier the expiry of five years from the date of its acquisition, the capital gain will be taxed aan nnEn nnn EREIReeeReeEREeERee iene CoptalGainTax Prepared by Ranjan Kumar Bhownicrevatx Member, NBR ar on 21/8/2022 Pages @at the usual tax rate applicable to the assessee's total income including capital gain or on capital gain @15% whichever of this two is lower. Thus, in short, the rate can be specified as below: Capital gain arises to Situation Tax rate @ company @ 1% (®) other than company Disposal witin 5 years | Atregular slab rate Disposal afer § years At regular rate or @ 15%, whichever is lower 15. n capital gain from sale of shares As per SRO 196-AIN/IT/2015 dated 30/6/2015, special reduced tax rate is applied on capital gain from sale of shares by specified persons as mentioned below: The following reduced tax rates are applicable on the income earned from transaction of shares listed in the Stock Exchanges: (@) Any income eared from Wading of sharesisecuriies by any Sponsor | Sharenolder / Director of a Bank, Financial Institution, Merchant Bank, | Insurance Company, Leasing Company, Portfolio Management Company,| 5% Stock Dealer or Stock Broker Company (b) | Any income earned from trading of shares/securities by any Shareholder [excluding the Sponsor Shareholders/Directors] having 10% or more shares of the total paid up capital of a company / companies listed at any time during | 5% the income year (©) | Ifa shareholder is a company or firm 10% 1. In case of transferring the shares by any sponsor shareholder / director tax will be deducted @5% on the difference between transfer value and cost of acquisition of the securities as per section 53M of the ITO, 1984 2. The income from trading of shares of all other type of taxpayers excluding those mentioned in the above lst is exempted from tax 16, Conditional gain tax exemption in case of non-resident assessee Capital gain from transfer of shares listed with stock exchange in Bangladesh of non-resident assessee is tax free subject to the condition that he/she is entitled to similar exemption in his/her home country. [6 schedule(part-A) para-43] ‘Sources [1] Income Tax Ordnance, 1986 [2] Snare market related SRO no: 196 dated 30672015 The End (Capital Gain Tax Prepared by Ranjan Kumar Bhownik rows Ex-Member, NBR as on 21/8/2022