Will the Long-Term Capital Gains Tax on Listed Equity return?
This time Prime Minister Narendra Modi started the rumour of bringing Long Term Capital Gains Tax.
On February 01, 2018, the Finance Minister Arun Jaitley will unveil the Union Budget 2018-19. This budget is very significant for the Modi government, as it is the first budget post GST and the last full budget before the general election in 2019. To appease the voters, government may announce some populist schemes. However, government may not want to shatter the image of a reformist government. Therefore, Budget 2018-19 is expected to be a right mix of populism and reforms.
One such reform is LTCG (Long Term Capital Gain) Tax. For almost 13 years now, the issue of reinstating the long-term capital gains tax on listed equity shares pops up with unerring accuracy weeks before the Union Budget presentation. This year is no exception.
This time the rumour returned on the strength of a reported proposal by BSE Ltd. that the tax be reintroduced. Capital market and tax experts are divided on whether the tax ought to make a comeback.
When and why it was removed?
Back in 2004, while presenting the Union Budget 2004-05, the then Finance Minister P Chidambaram had abolished LTCG tax on listed equities i.e. gains arising from sale on a stock exchange of equity shares held for more than a year.
But, he introduced the Security Service tax. The whole point of abolishing it was to encourage more people to get into the financial system and to bring the simplicity to the system through the Security Service Tax which you need to pay whether there is profit or loss and this system has stood for many years.
Why did the rumour start?
In December 2016, none other than Prime Minister Narendra Modi help restart the rumour when he mentioned it at an event hosted by the Securities Exchange Board of India.
"For various reasons, the contribution of tax from those who make money on the markets has been low.... To some extent, the low contribution of taxes may also be due to the structure of our tax laws. Low or zero tax rate is given to certain types of financial income. We should consider methods for increasing it in a fair, efficient and transparent way."
Therefore, this time as the rumour is started by none other the Prime Minister himself, therefore, there is a huge chance that LTCG will resurface in some form or the other. Moreover, one of the main aim of abolishing it was to get more participant in the equity market and currently the retail participation is at its highest peak.
In what form could it be introduced:
Concessional Rate: Finance Minister may think of putting some concessional rate on the long-term capital gains but maybe an exception could be made for small investors and STT could be abolished.
If this happens, it would be a great decision as then more retail participation will happen and Government would also be able to fetch more tax from the big bulls of the stock market without dampening the mood of the small retail investor.
By Retail Investors, I mean someone who make gains of Rs 2-3 lakh a year on Long term Capital Gains.
Definition of Long Term:
Currently any investment kept for more than a year is considered to be a long term and anything less than that, is considered to be short term and Government imposes 15% taxes on the short-term capital gain. Finance Minister in this budget may increase the Long-Term definition to 2 or 3 years.
If this happens, it would bring some pain to the retail investors, who liked to keep the stock for a short duration before selling, but would not hamper the long-term investors a lot. However, the real winner would be our economy as we would see more investors sticking for longer periods.
At last, I would just say that irrespective of what the decision is, it should not just be based on the financial numbers but should still take care of the retail participants, as the whole removal of LTCG tax happened to enhance retail participation and we should not stop it when it is at its peak.
Moreover, whatever the policy is – It should be simple to understand i.e. the taxpayer should not be put under any undue burden of calculating the taxes.