Will long-term capital gains be hit in the Budget?

By Larissa Fernand |  03-01-17 | 
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Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

Last month, there was plenty of animated discussion on whether the government would tamper with capital gains tax in the upcoming Budget.

There is no smoke without fire. The angst all stemmed from a statement of Prime Minister Modi’s speech at the new campus of NISM. He essentially advocated that those who profit from financial markets must make a fair contribution to nation-building through taxes.

  • Long-term capital gains

Currently, if the equity asset is held for at least a year, no tax is imposed.

What could happen : Minimum holding period could extend to 2 or 3 years. Or, tax-free gains may be capped. (An extension of the holding period should not affect investors adversely since they should have a long-term holding view when it comes to equity).

  • Short-term capital gains

There is a 15% tax on gain if stocks or funds are sold before one year.

What could happen : The tax rate could be hiked or gains added to the income of the investor.

In an interview with ET Now, Rakesh Jhunjhunwala of Rare Enterprises expressed his view very articulately. He believes that since STT will stay, the tax on capital gains won’t come into play.

He made three points:

  • It is a myth that stock market investors are not paying tax. They pay dividend tax. If your dividend income is more than Rs 10 lakh, you are paying 10% tax.
  • The government will either abolish securities transaction tax (STT), or impose long-term capital gains (LTCG). Nowhere in the world does a tax on transaction and a capital gain tax co-exist. Also, nowhere in the world has the government abolished STT.
  • The purpose of STT was to collect capital gains in a much easier manner. And today, the government gets around Rs 7,000-8,000 crore from the two exchanges.

He went on to state that he does “not think that there is so much purchase of equity or so much profit in long-term capital. If people do not invest in equity, where is the capital gains? At the same time, there is a need to encourage risk capital.”

If we follow his trend of thought, the introduction of LTCG implies the abolition of STT and the gains from LTCG tax will be neutralized. Going by his estimate, the government will need to earn Rs 7,000–8,000 crore more in capital gains tax. If the LTCG tax is 10%, investors will need to earn at least Rs 70,000 crore.

But Ajit Ranade, the chief economist at the Aditya Birla Group, comes up with a different perspective. He states in a post in Mint that the amount of tax foregone because of tax-free LTCG was Rs 64,521 crore in assessment year 2014-15. (He cites income tax data).  He also made reference to a research report in the Economic And Political Weekly that estimated the loss to the exchequer due to capital gains tax exemption at Rs 45,000 crore.

Ranade concludes that the LTCG tax exemption should kick in after completing 3 years. Anything shorter, the capital gains should be like regular income.

Interestingly, according to a recently conducted poll, CEOs are expecting Budget 2017 to announce incentives such as lower corporate and personal tax.

The 25 CEOs polled across Indian cities pointed to the slowing economy and the impact of demonetization (the negative impact will continue for a few more quarters) as reasons for their belief. In fact, more than half of the respondents expect their growth plans to be hit in 2017 owing to demonetisation.

Sunil Kanoria, President of Assocham, said in an interview with BTVi, that individual tax and corporate tax must be brought down in the Budget “so that there is money in the hands of people for consumption and investment”.

In the same post mentioned above, Ranade explained why this is very unlikely.

  • The tax to GDP ratio in India is very low. At 16.6%, it is lower than the emerging market economy average of 21% and the OECD average of 34%.
  • If you believe the above figure is skewed because agriculture is exempt from taxation, even the ratio of tax to taxable GDP is still quite low. Even when compared with the G-20 countries and countries with similar per-capita income.
  • Instead of overall tax collection, if we look at only the direct tax to GDP ratio, India is nearly at the bottom.

Finance Minister Arun Jaitley was quick to state that tampering with the capital gains tax was not the government’s intention, post the drama of Modi's statement. So in all probability, there won't be any action on that front. Having said that, we won't have to wait long to see what the government plans to do.

Union Budget 2017-18 will be presented on February 1, 2017.

It has been brought forward to ensure that the proposals can take effect from the start of the next financial year (April 1). For the first time, the Railway Budget will be merged with the Union Budget. And the distinction between plan and non-plan expenditure will no longer exist.

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Premsunder Das
Jan 5 2017 04:31 PM
Nowhere in the world are so many transaction charges are imposed on equities Currently 8 different taxes are collected as a result of which transaction cost is 400 percent more than Developed Markets The main culprit is STT which is the highest component of Transaction costs. This creates huge volatility. Most of the intraday and short term investors lose a lot of money. Forgt what the world does. And abolish STT and introduce LTC gains or introduce Nominal GST
Suleiman Haq
Jan 5 2017 02:56 PM
The only thing this Government can do is tax people and distribute this wealth of hardworking ordinary citizens to the poor and hungry whose numbers continue to increase under the current administration
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