With collections from securities transactions tax (STT) not showing the kind of buoyancy that might have been expected, even though the stock markets have done reasonably well over the past few years, it might be a good time to rethink the taxes on share transactions. There could be a case for increasing the STT rate, which is a tax that can be easily levied and collected. However, given how trading volumes in derivatives on the Singapore Exchange are picking up—with derivatives in stocks having been launched—the government would understandably not wish to upset foreign investors who already feel the cost of transacting in India is high. Indeed, a robust derivatives market is important to keep the overall volatility in check, as also systemic risks; as such, exporting the derivatives trade to Singapore, which is an efficient jurisdiction, may not be a good idea. Already, all treaty benefits applicable to institutional investors have been discontinued from April 2017 though they have been allowed to grandfather their investments. Moreover, GAAR has also kicked in.
A better way out for the government would be to realign the tax structure to make it more equitable across asset classes. Investors now pay a 15% tax on capital gains for shares sold within a period of one year, and zero long-term capital gains tax if these are held for more than a year. In the case of property, however, the long-term capital gains tax on the sale is zero only if the sale takes place after three years. Perhaps, one could apply the same rule to shares and levy zero long-term capital gains if shares are sold after three years of the purchase. Some capital market participants have expressed concerns over the manipulation in penny stocks which is possible because the long-term capital gains tax kicks in after just one year. Raising the holding period to three years would help solve that problem. There is some apprehension small investors might be put off by a longer holding period and that it would result in a drop in the share of household savings in shares and debentures which are already very low. But there is a case for encouraging long-term investments. As for foreign institutional or portfolio investors, a good number—perhaps, the majority—do tend to stay invested for long periods, especially those that are handling retirement money. They should not be unduly upset and any hit to the sentiment should be temporary.
In the debt market, too, a sale before three years attracts tax at the marginal rate while, after three years, the tax of 20% can become virtually nil, thanks to the indexation benefits. That makes debt mutual funds more attractive savings instruments than fixed deposits which attract tax on the interest earned, at the marginal rate, save for an exemption `10,000 per annum on the interest earned from savings balances. They will get a further boost if the government increases the holding period for listed securities to three years to make them eligible for long-term capital gains tax. That’s because, currently, some investors buy listed debentures since these attract a long-term capital gains tax after just one year whereas, for an MF scheme, the long-term capital gains tax of 20% kicks in after three years.