It’s been more than two weeks since the inception of much anticipated tax on capital gains (LTCG tax) is introduced. As per market’s surveys this amendment was much expected in the budget session. Hence it does not come out to be a big surprise when government announced tax on capital gains @ 10% on securities transaction. This reminds us of the days when in 2004 P. Chidambaram presented the union budget of 2004- 2005 and abolished long-term capital gain tax and imposed new tax called the Securities Transaction Tax (STT)
We all saw the headlines in the newspapers and breaking news flashing on TVs that how this step of government on taxing of capital gains (LTCG tax) is a wrong move.
Let us try to understand why tax on capital gains (LTCG tax) is need of hour for the Indian economy.
First of all we need to understand the new tax provision which states that:
If we sell any security (equity shares of Mutual Funds which are equity oriented) after one year from purchase date through a recognised stock exchange i.e. BSE or NSE, there will be a tax @ 10% on selling of these shares on which STT is paid.
We would like to highlight the fact here that LTCG tax is not a new concept but an old one. The same was existing before union budget 2004- 05. In 2004– P.Chidambaram, announced the abolishment of long term capital gain tax from security transactions and in lieu of that introduced another tax called Securities transaction tax. STT is levied whenever any transaction (buying/selling) of securities takes place through a recognised stock exchange i.e. BSE or NSE.
Originally in 2004 – 05 budget, this rate was kept at 0.15% which is quite high, but in 2013 after lot of pressure from investment community the rates were reduced to 0.1% on the turnover. Currently the collection of STT is estimated to be approx. 9000 core.
Before 2004 government was able to tax only those long term capital gains on securities where people declared their respective returns but with the introduction of STT, LTCG was abolished and STT was automatically added in every sale or purchase transaction and hence the windows of evading tax on capital gains was closed.
India was the 6thcountry after Cayman Islands, Cyprus, Mauritius, Singapore and Hong Kong that exempted LTCG. The first two are doors for tax evaders while Mauritius is a low tax jurisdiction country.To grow and become financial hubs Hong kong and Singapore offered tax incentives. Capital gains are taxed all over the world except above five mentioned countries. Since India being dominantly developing economy, there is no point to exempt the gains from tax on capital transaction.
As per BSE data on number of investors, it identified 3.23 crore registered stock market investors in total. If we work out investors as a percentage of total work force population of India which is around 48.18 crore, it comes out to be merely 0.7% of total workforce population which signifies that very few people are investing in stock market. Also, if we check the investment flows, then also majority of the investments are through FIIs (foreign institutional investor) or through other large investors who are rich by Indian standard.
Not taxing the capital gains of these big wealthy giants will be unfair and does not provide any cause for not taxing the capital gains for an economy like India. Tax exemption on LTCG was leading to rich becoming richer and poor remaining poor.
We do often compare India with China. China has high tax rate as much as 25% tax on capital gains but it has made records in terms of flow from both FIIs and Domestic investors. Advocating the fact that high tax rate leads to fall of stock market or will stop investment flows hence can be safely ruled out.
Moving ahead, LTCG in 2004 was abolished so as to provide a playing field for domestic investors and investors coming from Mauritius route to India. Due to tax agreement between India and Mauritius, there was no tax on capitals gains on Mauritius investors investing in India. Now that tax agreement is amended there is no point on keeping the distinction between domestic investors and foreign investors.
As per Revisiting Capital Gains Tax on Securities in India written by Prashant Prakash, Jaya Kumari Pandey, Abhishek K Chintu, India has one of the lowest tax – GDP in the world. There is a need to utilize every tax instrument, including the capital gains tax on securities, to broaden the tax base. It may be interesting to mention that savings of majority of individuals are generally kept in the form of land or jewelry by middle class families instead of shares. Government is expected to make a revenue of approx. 32,000 crores which can contribute to 0.2 percent of India’s GDP.(GDP is basically the market value of all goods finals goods and services produced in a period of time)
As we mentioned above, if there is a fear that investors will shy from investing or there will be adverse impact on Stock market we should remember that stock market fails if market prices gets ahead of its true value and not because of tax implications. In fact this tax will only lead to genuine stocks having value worth to sustain in market.
Mostly, the tax proportion of indirect tax to direct tax in developed countries is 1:1. While in India this proportion is 3:1. For India being on path of progress of economic expansion will not be ideal if the gains on securities is not taxed.
We cannot deny the fact that domestic investors are increasing in number and forming big part of investors group. Hence to encourage the small investors an exemption up to a large amount of Rs. 1 lakh on capital gains from equity transactions is given. Also, it is applicable from 2018-19 which means any realized income from sale of securities up to 31st March 2018 will be exempted.
LTCG tax is a demand as per current world economic scenario. It is not to discourage small investors.
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