The Parthasarathi Shome committee which reviewed the controversial anti-tax avoidance rules had recommended abolition of short-term capital gains tax. The committee had sought to justify this, citing other jurisdictions where the rate of tax on capital gains is zero and forecasting that abolishing this tax could encourage fund managers of FIIs to shift their bases to India.
Shome is currently adviser to finance minister P Chidambaram and is part of the Budget-making team.
Sources said the government plans to widen the tax base so as to be able to lower tax rates. Doing away with existing taxes does not align with this philosophy. Chidambaram had indicated at an interaction with investors in London last week that he was unable to narrow the tax base any further.
Listed securities, if sold within a year of purchase and on which securities transaction tax (STT) is paid, attracts a short-term capital gains tax of 15% at present, while selling after a year of purchase (long-term capital gains) is exempt. On sale of unlisted securities too, there is an incentive of a lesser tax rate (20%) if sold after a year of purchase compared to a 30% tax rate if sold within a year.
The government's objective of encouraging long-term holding of securities through tax incentives is to bring stability to an otherwise volatile market, said Rajiv Chugh, partner, Ernst & Young. Removing short-term capital gains tax on listed securities could encourage day trading and add to market volatility.
The Shome panel, in its final report on general anti-avoidance rules (GAAR), made public by the finance ministry recently, recommended abolition of the tax on gains arising from transfer of securities, being equity shares or units of equity oriented mutual funds, which is subject to STT, whether in the nature of capital gains or business income, to both residents as well as non-residents.