By Alok Singh
Budget 2018: Long Term Capital Gain Tax (LTCG) is not new to the Indian market, but last time when it was removed from equity related gains, the Securities Transaction Tax (STT) was introduced with the objective of better tax compliance. So, to be fair, the Government should have changed the STT structure along with the introduction of LTCG. But apparently, the equity market has become a victim to its own success.
However, this doesn’t mean that with the introduction of LTCG, Indian equity has suddenly become unattractive for a long term investor. Indian equity market has generated a CAGR of over 15% in the last 20 years, which is higher than any other asset class even if we adjust it from tax. There is no reason to believe that Indian equity market will not be able to maintain a healthy CAGR going forward.
Specially, when global economic growth is coming back and the Indian Economy itself is pegged to grow over 7% with reasonable amount of inflation. The ongoing result season so far has been much encouraging than previous few quarters and earnings growth seems to be returning to the equity markets. These along with the structural reforms taken by the Government so far should allow markets to remain positive.
Despite LTCG, the Individual Investor participation into the equity market through mutual fund will not be dying soon. The reason is absence of any other investment avenue which is expected to do as well and also is as liquid as this asset class. Though we are focusing on the local issues we should also not forget that the Indian Equity market also had a lot of momentum coming from positivity in the global market and we don’t expect that to be fading soon.
I think this motivated the finance ministry to try and raise some additional revenue by imposing LTCG on the equity related gains. Finally we all should also acknowledge that the long term investment decisions have to be based on the return profile of the asset class over the period of time and not solely on the tax arbitrage.
Alok Singh, Chief Investment Officer, BOI AXA Investment Managers