Tax RateThe IT department is on a keen drive to increase tax collections and curb black economy. As per reports, a proposal is under consideration whereby tax exemption on long term capital gain would only be restricted to investments made in shares of companies constituting the BSE-500 index.

Presently, exemption u/s10(38) is allowed on long term capital gains generated from sale of equity shares of any companies/units of an equity-oriented fund provided that the transaction has taken after October 2004, and the securities transaction tax has been paid.

Moreover, there is another proposal whereby income shown under “Income from other sources” would be taxed at the maximum marginal rate (which is the rate of tax including surcharge, if any applicable in relation to the highest slab of income) if the source is not disclosed or the source is not convincing to tax authorities.

No doubt, these provisions will certainly increase governmental revenue and discourage the practice of bringing unaccounted money into the regular system but they will also act as deterrant to investment in equities by retail investors.

More importantly, taxing unexplained income at maximum marginal rate of tax will be a major disincentive to disclose black income and unless black income is introduced into regular economy, it would not be beneficial for the country since it prevents capital formation. Source