The government plans to exempt the sale of a house or any other asset from capital gains tax if the proceeds are used to set up a business, hoping that such a concession in the proposed manufacturing policy would encourage people to turn entrepreneurs. A committee of secretaries will meet Tuesday to give final shape to its planned national manufacturing policy, which proposes sops for small and medium businesses that aim to increase the sectors share in GDP to 25% by 2025 from the existing 16% and create over 100 million jobs. All individuals reinvest their capital gains;so, we are proposing to give capital gains exemptions to these SMEs, and hence encourage them to put (such gains) into venture capital funds or businesses instead of locking up funds in unproductive assets like housing, said a senior official of the Department of Industrial Policy (DIPP). However, the proposal is facing resistance from the revenue department and the Central Board of Direct Taxes. The incentive is akin to that available under sections 54 and 54E of the Income-Tax Act, 1961. Under section 54, capital gains tax is not levied if the proceeds from the sale of a residential house are used to purchase or construct another house.
This is a step in the right direction to ease the financing woes of SMEs, said Federation of Indian Small and Medium Enterprises president V K Aggarwal. National and Small Industries Corporation chairman-cummanaging director H P Kumar told ET: Apart from enterprises, if investors could avail of the exemptions when they invest in the small enterprises, this would make SMEs an attractive destination for investments and help ease the credit crunch faced by them. The policy has proposed several other incentives to make more finance available to SMEs, which contribute about 9% to the country's GDP and account for 45%- 50% of its exports. The policy has suggested capital gains tax exemption on investments in equity schemes or units of mutual funds that specifically target manufacturing SMEs, which account for 45% of Indias factory output. SMEs employed 69 million people in 2009-10, up 137% from 29 million in 2005-06, making the sector the second largest employer after agriculture. DIPP says the tax relief would also help curb black money generation as there wont be any incentive left for sellers to under-report transactions. This is also a far better way of checking black money as it will be an incentive for people to put money into the system instead of housing, the official told ET. Much of Indias black money is estimated to be parked in real estate. FICCI assistant secretary general Jyoti Vij says: Obviously, with tax exemptions on capital gains, there will no longer be any incentive to hide your money and one can deploy funds in productive transparent assets, thereby bringing down cash exchanges. Although the revenue department and CBDT say the policy is not feasible to implement, DIPP claims investments in factories and manufacturing are foolproof unlike housing transactions, which sometimes are not certified and hence lack transparency. - www.economictimes.indiatimes.com
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