Budget 2018: With the stock market making new peaks, investors are looking for handsome gains. Not lagging behind, in a bid to boost its tax revenues from the financial market, the Modi government is also expected to propose certain amendments in the provisions of capital gains taxation via the upcoming Union Budget 2018. It is anticipated that the government might either raise the holding period for long-term capital gain (LTCG) tax exemption on listed equity securities to two years from the current limit of 1 year or it may discontinue the tax-free status of such long-term capital gains by levying tax on such transactions.
From over a decade, there has been no tax on the capital gains arising on the sale of equity shares if held for more than one year. This was primarily introduced in order to encourage investments both from retail and institutional investors. However, in a meeting held back in 2016 with Prime Minister Narendra Modi, it was suggested by some economists to widen the tax base for the equity market which is currently enjoying the benefit of low or nil tax rates. The amendment in the holding period, as expected to be proposed in the Budget 2018, would bring in parity with the holding period that already exists for unlisted shares and other capital assets. However, the said proposal if introduced might have an adverse effect on the ongoing bullish phase of the Indian stock market.
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The other option which Finance Minister Arun Jaitley may consider is to re-introduce a nominal tax on the LTCG arising on the equity shares. It is imperative to note that the recent amendments in tax treaties with countries like Mauritius, Singapore & Cyprus gives power to the Indian tax authorities to tax the capital gains arising out of India. Hence, now levying tax on LTCG arising on equity shares could prove to be a next step in this line of approach.
One of the arguments put forward by tax experts, if believed, is that the government has been eyeing to compensate the uncertainty & low tax collection on account of recently introduced GST, by widening the direct tax base. The government had to cut GST rates in order to lessen the burden of this new regime both on the consumers and businesses. This had an adverse impact on the fiscal budget of the government and thus any additional tax revenue would be of aid in this situation.
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Many trade pundits if confronted with above arguments will surely have no choice but to agree that levying tax on LTCG on equity shares looks to be an immediate remedy for the government treasury. However, a large section of the stock market players has demanded for discontinuing ‘Securities Transaction Tax’ (STT) to impart some relief to the stock exchanges and brokers trading in large volumes. Now the decision rests with FM Jaitley to make a logical choice by undertaking a cost-benefit analysis between introducing a tax on LTCG on equity shares vis-à-vis abolishing the STT.
The above proposals were also discussed during the previous year’s Union Budget but the government did not pursue the same anticipating adverse reactions in the equity market. So, it will be interesting to see whether these amendments would take place in the Union Budget 2018 or not, when the stock market is at its best.
(By Akhil Chandna, Director, Grant Thornton India LLP, with inputs from CA Ajay Arora)