Comment on the important changes introduced in respect of the Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019.

The Union Budget 2018-19 made two notable changes affecting equity investors, aimed at widening the tax base and reducing distortions between asset classes.

Long-Term Capital Gains (LTCG) Tax

• LTCG on listed equity shares and equity-oriented mutual funds, which had been exempt, was reintroduced at 10 per cent on gains exceeding Rs 1 lakh in a year, without the benefit of indexation.
• A grandfathering provision protected gains accrued up to 31 January 2018, so only appreciation after that date is taxed.

Dividend Distribution Tax (DDT)

• A DDT of 10 per cent was introduced on dividends distributed by equity-oriented mutual funds, to bring parity between the growth and dividend options and between equity and debt schemes.

Rationale and impact

The measures sought to tax a large and rising pool of untaxed capital-market gains, curb the routing of income as tax-free dividends, and mobilise revenue. While they marginally raised the tax burden on investors, grandfathering limited retrospective impact, and the reforms improved horizontal equity across asset classes.