Seven key factors regarding taxation of artwork sales

Some of the key factors regarding tax and works of art as an asset are as follows:

1. Art was not earlier considered or treated as a tangible capital asset. As a result, any (monetary) gains that were made on sale of such assets were not subject to any capital gains tax provisions. This was the case until March 31, 2007.
   
   
2. Post the modified provisions, such gains were no more tax-free. The amended definition of capital asset widened the list of objects for purpose of computing capital assets, including paintings, drawings, sculptures, archaeological collections.
   
   
3. The new Direct Tax Code (DTC) to come into effect from 2012 (April 1, 2012) currently in the form of a Bill that awaits enactment, also has proposed extending the levy of wealth tax to objects such as drawings, paintings, sculptures, archaeological collections and every other work of art.
   
   
4. If you happen to keep an artwork for a period of three years (at least), the monetary gains out of its transaction would be tantamount to a long-term capital gain.
   
   
5. The gain you make would be computed on basis of cost indexation. This will be done taking into the account the prevailing cost inflation index. The gains computed thus will be taxed at 20%. The effective rate, however, would be less than 20% of the actual monetary gains owing to cost indexation.
   
   
6. If you sell it within three years of having bought an artwork, the short-term capital gains would be taxable at normal tax slab rates.
   
   
7. The sales tax (value-added tax) you would pay on the purchase would also form part of cost of acquisition to compute your capital gains made.

Another pertinent issue is the cost of maintenance and restoration. If you have purchased an old work of art (painting, drawing or sculpture) and have spent for its restoration, can you choose to claim the cost for deduction purpose while calculating your capital gains (by treating it as a normal expense)? Here too, legal provisions are in the form of certain ifs and buts…