Income Tax
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Income tax is that percentage of your income that you pay to the government to fund infrastructural development and other important works. All taxes which are levied on individuals are based on the Income Tax Act, 1961. It is the only direct means of taxation like capital gains tax, securities transaction tax, etc.

However, all these activities are based on the types of activities an individual carry out. One such type of income which may be taxed under the head ‘Capital Gains’, depending on whether you are regularly trading in the asset or you are an investor of the asset. Many individuals decide to convert their capital asset into a business asset and vice-versa. This conversion too comes under income tax and there are certain provisions to it which are covered under Budget 2018-19.

Let’s take a look at various existing and proposed implications for conversion of a capital asset into a business asset:

Provisions before budget 2018-19

According to provisions existed before the budget, if an individual converts a capital asset into a business asset, the fair market value of the property on the date of conversion shall be deemed to be the full value, received as a result of such conversion.

However, as per the law, the individual doesn’t have to pay the tax on such conversion, in the year in which it has taken place. The taxation of profits on such conversion is postponed, till the time the capital asset so converted is actually sold. So, on the sale date, the profits shall be divided into two parts.

  • The fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner.
  • The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession.

Proposed provisions in Budget 2018

As the present income tax laws do not have any provision, to deal with a situation where a stock in trade is converted into or treated as a capital asset. So, the Budget for 2018-19 has proposed that:

  • The date on which a stock in trade is converted into or treated as a capital asset, the difference between the market value of both, will become taxable as business income. So, even though a property owner may not have received any money on such conversion, he/she still have to pay income tax on the difference between costs.

Moreover, when the developer sells the property which is treated as a capital asset, they shall have to pay capital gains tax, on the appreciation between the date of such conversion and the date of actual sale.