Taxation of capital gains has been a controversial issue. The controversy revolves around the issue as to whether capital gains are income or not. Income tax is a tax on income and is not meant to be a tax on anything else. The argument against the taxation of capital gains, according to accounting and commercial concepts, is that it is not an income and that capital gains are unexpected and unsought, and as such cannot form part of taxable income. The argument for taxing capital gains is based on equity and efficiency considerations. Despite the controversy surrounding the chargeability of capital gains, tax on capital gains is levied in India. The issue, therefore, is how the capital gains tax is computed. The present paper attempts to evaluate the structure and reforms of capital gains taxation in India. After going through the evaluation of tax on capital gains, the study concludes that the taxation of capital gains in India has failed in its real objective to raise revenue in an efficient manner, to plug the possible leakages in tax collections, to use the capital gains tax provisions as social welfare measure and also as an incentive to give direction and growth to the economy.

In India, income tax liability is computed on the basis of income, which is defined on the basis of net accretion principle. According to this principle, income is treated as net accretion of economic power between two periods of time. Thus, for an individual, net accretion to his/her economic power would include the amount of spending plus accretion to his/her wealth. More comprehensively, income includes cash incomereceived in the form of wages, interest or dividend; imputed incomesuch as imputed rent from owner-occupied houses; and accrued income and appreciation in the value of assets held. Thus, the scope of income covers capital gains.

While justifying the taxation of capital gains, Indian Tax Institute (1997a) states,"Thus, in terms of net accretion principle, capital gains should be taxed as part of income. Their taxation is justified both on equity and efficiency considerations. From equity angle, their inclusion in the income tax base is required because capital gains represent, like other sources of income, net accretions to spending power. The case for taxation of capital gains is further strengthened for they accrue unevenly among the population because the wealth is unevenly distributed. On efficiency grounds, the taxation of capital gains discourages investment in unproductive assets (such as gold, paintings, and antiques) and speculative activities" (Indian Tax Institute, 1997b, p. 1).

Applied Finance Journal, Capital Gains Taxation, Income Tax Liability, Economic Power, Capital Gains, Capital Assets, Tax Reforms Committee, Long-term Capital Gains, Tax Administration, National Bank for Agriculture and Rural Development, NABARD, Rural Electrification Corporation Limited, Public Sector Bank.