3. WHAT DO YOU UNDERSTAND BY THE TERM”CAPITAL GAINS”
USED IN THE INCOME TAX ACT? WHAT ARE THE RULES REGARDING
EXEMPTION OF CAPITAL GAINS.
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Answer / ameet
A capital gain is a profit that results from investments
into a capital asset, such as stock, bonds or real estate,
which exceeds the purchase price. It is the difference
between a higher selling price and a lower purchase price
resulting in a financial gain for a seller.
As per AY 2008-09 Dividends that are distributed attract a
tax of 15 per cent. Short term capital gains attract a tax
of 10 per cent under Section 111A. There is merit in
equating the rates and hence increased the rate of tax on
short term capital gains under Section 111A and Section
115AD to 15 per cent. This encourages investors to stay
invested for a longer term.
| Is This Answer Correct ? | 14 Yes | 3 No |
Answer / srinivas annavarapu
A capital gain is a profit made out of selling a non-
inventory capital asset like Land & buildings, bonds,
stocks etc.
In India longterm capital gains (equity held for more than
one year are exempted from tax if they are sold through a
recognised stock exchange and STT is paid on the sale.
and short term capital gains are taxed at 15%(equity) and
can be reduced against short term capital loss and others
are taxed at the same rate as any other income.
| Is This Answer Correct ? | 3 Yes | 1 No |
Answer / nara
The amount by which an asset's selling price exceeds its
initial purchase price.
| Is This Answer Correct ? | 1 Yes | 2 No |
Answer / madhu
Capital gains are the gains made by investing in stock
markets
capital gains are normally taxable at a rate of 30%
| Is This Answer Correct ? | 3 Yes | 5 No |
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Read the case given below and answer the questions given at the end. Krutika Designers Ltd is an Indian company engaged in designing shirts for an international shirt manufacturer. Its operations are currently restricted to designing shirts for the Indian market. The firm is interested in extending its operations to the European markets, but is restricted by its lack of knowledge about the latest fashions and trends prevailing there. Hence, the firm has decided to open an office in Finland for establishing a network in Europe that will give the firm access to the needed information. The firm feels that its does not have the capability of sustaining itself in the foreign markets in the long-term, and will be able to generate additional revenue from these activities only for the next 5 years. After that, the Finnish office will have to be closed down. The firm anticipates an initial investment of Rs.14 million. The project is expected to generate the following cash flows over the 5 years period. Year Cash flow (Finnish Marks) 1 2 3 4 5 10,00,000 20,00,000 50,00,000 50,00,000 30,00,000 These cash flows are expressed in terms of today’s money. The firm can claim depreciation in India according to the Straight Line Method. The salvage value from the project is expected to be nil. The Finnish Government does not provide any incentives for foreign investments. However, currently it is making an attempt to have better economic ties with India. Hence, it has decided to extend a loan of 50,000 marks to Krutika Designers. The loan will be at a concessional interest rate of 7%. The loan is to be repaid in 5 equal annual installments which will include the interest payments. The project will generate additional borrowing capacity of Rs.5 million for the firm. However, as the firm does not have any firm contract with the international shirt manufacturer, its domestic revenues are expected to be very volatile. Therefore, there is no surely that the firm will be able to absorb the tax benefits arising out of depreciation and additional borrowing capacity. The firm does not intend to indulge in any illegal money transfers. The current spot rate for the Finnish Mark is Rs.7.25/FM. The inflation rates in India and Finland for the next 5 years are expected to be 8% and 3% respectively. The exchange rate is expected to move in tandem with the inflation rates. Indian tax rate is 35% while Finnish tax rate is 40%. India and Finland have entered into a tax treaty whereby the earnings of the residents of one country are taxable in that country only. In India, the nominal risk-free interest rate is 11%. The same is 6% in Finland. The Indian nominal interest rate (including risk-premium) is 15%, while that in Finland is 9%. The nominal all-equity rate in India is 18%. 1. Comment on the financial viability of the project. 2. What are the different circumstances in which nominal all-equity discount rate and real all equity discount rate should be used for discounting the cash flows? Explain the rationale behind it. 3. Comment on the financial viability of the project if the firm is sure about being able to absorb the tax benefits arising out of depreciation and increased borrowing capacity. 4. Explain the concept of exchange risk and how it affects an international project. 5. How can the financial structure of a project be used to overcome repatriation restrictions? What are the additional benefits of such maneuvers?
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