Context:
- The Securities and Exchange Board of India (SEBI) has simplified the process of transmission of securities from a nominee to the legal heir.
- The reform addresses persistent issues where such transmissions were wrongly treated as ‘transfers’, leading to incorrect capital gains tax assessment.
- The move strengthens investor protection, ease of compliance, and governance in capital markets.
Key Highlights:
Government Initiative / Regulatory Measure:
- Introduction of a new reporting code “TLH” – Transmission to Legal Heirs.
- Applicable to the transfer of securities upon the death of the original holder.
- Ensures that such transactions are clearly distinguished from taxable transfers.
Policy & Legal Provisions:
- Section 47(iii) of the Income Tax Act, 1961:
- Explicitly exempts transmission of capital assets to legal heirs from capital gains tax.
- The absence of a dedicated reporting code earlier often resulted in erroneous tax treatment.
Institutional Coordination:
- The reform was recommended by a Working Group constituted for this purpose.
- Consultations were held with the Central Board of Direct Taxes (CBDT) to align tax reporting and securities regulations.
Significance / Applications:
- Prevents automatic classification of inheritance-related transmission as a sale/transfer.
- Reduces litigation, refund claims, and administrative inconvenience for investors.
- Enhances clarity and standardisation in market reporting systems.
Relevant Prelims Points:
- Issue: Wrongful levy of capital gains tax on inheritance-based securities transmission.
- Causes:
- Lack of a distinct reporting mechanism in securities transactions.
- Government / Regulatory Initiative:
- SEBI’s introduction of the “TLH” reporting code.
- Benefits:
- Correct tax treatment as per Income Tax Act provisions.
- Greater ease of doing business and investor confidence.
- Challenges:
- Need for awareness among market intermediaries and investors.
- Impact:
- Simplified compliance and reduced tax disputes in capital markets.
Relevant Mains Points:
- Facts & Definitions:
- Securities: Tradable financial instruments representing ownership or creditor relationship.
- Legal Heir: Individual legally entitled to inherit the assets of a deceased person.
- Capital Gains Tax: Tax on profits from the transfer of capital assets.
- CBDT: Apex body for administration of direct taxes under the Ministry of Finance.
- Conceptual Clarity:
- Distinction between “transfer” and “transmission” is crucial for fair taxation.
- Regulatory coordination enhances good governance and taxpayer convenience.
- Keywords: Investor protection, regulatory simplification, tax certainty, capital market governance.
- Way Forward:
- Wider dissemination of guidelines to depositories and intermediaries.
- Integration of reporting codes with digital tax filing systems.
- Periodic review to plug procedural gaps in investor-related regulations.
UPSC Relevance (GS-wise):
- GS Paper 2: Governance, regulatory bodies, ease of compliance.
- GS Paper 3: Capital markets, taxation, financial sector reforms.
- Prelims Focus: SEBI, CBDT, Income Tax Act provisions, capital gains exemptions.