Get tough: A lenient capital gains tax regime has been distorting incentives

livemint.com:

The recent budget presented by the finance minister saw a spurt of adverse commentary on the proposals relating to capital gains transactions, particularly with reference to the removal of indexation benefits. In response, the government partially restored the benefits to a segment of taxpayers.

However, as the FM has promised re-visiting and simplifying the entire structure of direct taxes, it is worth taking a closer look at these issues. Indexation in capital gains was first introduced in the 1992-93 Budget, when the FM then had stated, “The present tax treatment of long-term capital gains has been criticized on the grounds that the deduction allowed in computing capital gains is not related to the period of time for which the asset has been held.

It does not take into account the inflation that may have occurred over time. The Chelliah Committee has suggested a system of indexation to take care of the problem, and I propose to accept its recommendation." Based on this, the Income Tax Department started producing a cost inflation index which has been used to compute long-term capital gains (LTCG).

The only substantial change which occurred was in 2017, when the base year for calculating this index was changed from 1981 to 2001. As per the Finance Bill of 1992, “‘Cost Inflation Index’ for any year means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non-manual employees for that year, by notification in the Official Gazette, specify in this behalf." The Central Statistical Office (CSO) used to produce the consumer price index (CPI) for urban non-manual employees till 2010, after which it was replaced by CPI Urban.