Short-term tax to hit equities but institutions not hurt

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The Indian capital markets, which has been on a losing streak since January, received one more blow when finance minister Palaniappan Chidambaram announced an increase in the short-term capital gain tax from 10% to 15%, which left the day traders gasping for breath.

The increase in this tax will keep the day traders at bay, some believe, seriously affecting the volumes. Others hold that it is the beginning of the trend where Indian capital markets are moving from less of speculation and more of fundamentals. They seem to agree with the finance minister who in the budget speech said that the increase in the short-term capital gain tax will encourage investors to stay invested for a longer period.

The securities transaction tax (STT) was kept untouched in the Budget but it would be treated like any other deductible expenditure against business income. Also, options premium will attract STT. It will be liable on the sellers when the option is not exercised while the liability will be on the buyer when the options are exercised and STT will be levied on the settlement price.

Short term capital gain tax is the tax levied on the appreciated asset of the individual which is held for a period of one year or less than that. Assets held for more than a year are exempted from tax.

Ashok Kumar Jain, chairman and managing director of Arihant Capital Markets Ltd, said, “The intention behind increasing short-term capital gain tax is to encourage long-term investments in equities and to deter short-term investors. Markets reacted negatively to the development as it had in the past when STT had been introduced. The proposal to hike the short-term tax would not have a very significant impact on the markets in the long run as most of the institutional players are long-term investors any way. This move could affect the liquidity provided by retail investors in the short term.”

Janak Mehta, president of LKP Securities, said that any raise in any tax is sentimentally not very welcome. However, 5% is not going to be significant as such. Rising of STT could have an effect on impact costs and volumes in the stock market.”