Answer: 

Introduction:

Under the Indian taxation system, Capital Gain Tax (CGT) is levied on any profit arising from sale of ‘Capital Asset’. Depending on the length / duration of the ownership before selling of the asset, this tax is further divided into Long term CGT and Short term CGT.

Dividend Distribution Tax (DDT) is levied on the amount of profits paid by the company in the form of dividends to its shareholders.

Body:

Changes introduced in Budget 2018-19

• 10% LCGT on profit exceeding Rs. 1 lakh:
  • Since 2015 until 2018, if an investor sold his shares / (equity) Mutual Fund units after holding it for over a year, then his profits were not subjected to Long term capital gains tax (LCGT). To support investments while reasonably taxing profits, Budget-2018 announced to levy 10% LCGT on profit exceeding Rs. 1 lakh during the sale of shares (equities) & equity mutual funds.
  • It addresses the bias against investing in manufacturing and prevents erosion in the tax base. Furthermore, it brings listed shares on par with unlisted shares that are already taxed.
• Introduction of a 10% tax on distributed income by equity oriented mutual fund:
  • Previously Equity Mutual Fund distributing income to its investors, were not subject to DDT. Now they’re subjected to 10% DDT.
  • This creates a level playing field across growth-oriented and dividend-distributing funds, where dividends from equity-oriented funds were previously tax-free and exempt from paying DDT.

Conclusion:

A good taxation system should be “progressive” i.e. those with higher incomes should be taxed at higher rates. However, the previous system exempted even the rich from LCGT, and helped promoters to dodge the DDT. Budget-2018 has taken appreciative reforms to address these issues. The changes in LCGT and DDT are steps in the right direction towards creating a level playing field and ensuring fairness in the taxation system.

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