UR Bhat managing director of Dalton Capital Advisors said the government's intent is clearly to bring down taxation levels while, at the same time, reducing myriad exemptions. However, the government is not likely to do it in the 2018 budget because it is the last budget before the federal elections.
Market participants have expressed concerns over the possibility of introduction of long-term capital gains tax (LTCGT) on the sale of shares, as reported in the recent past, in the upcoming Union Budget, and warned that such a move could significantly dampen market sentiment. They are hopeful that, this being the last full budget of the government before the general elections, it may not proceed on what the participants see as an investor unfriendly move. “Equities may not be considered an attractive option for investment if this happens,” said Yogesh Chande, partner and securities law expert at Shardul Amarchand Mangaldas, a law firm. He is also against tinkering with the period to define what is long-term, in light of reports that to be classified as long-term, an investor may need to hold a stock for 2-3 years, instead of the one year at present. “Introducing longer period of LTCG may also have an impact on the behavioural pattern of investment in stock market. In my view, there may not be any changes in STT rate and I don’t think LTCG will be introduced or the period will be raised,” Chande added. “At this point, capital creation and encouraging flows in the economy and public markets is a key requirement. Thus, perhaps, one may not see tinkering with the LTCG exemption at least for this year,” agrees Vivek Gupta, partner – Tax at KPMG, a global tax & consulting firm.
“Market returns on the listed long-term stock are effectively higher because you don’t have to pay that tax. And this aids the flow of money into the markets for growth. For the government, a part of what they are giving away in long-term capital gains tax exemptions is coming back to them in the form of securities transaction tax (STT),” Gupta added. According to media reports, the Bombay Stock Exchange has proposed the reintroduction of LTCGT, citing exemptions that caused huge revenue loss to the government. It also argued that a longer holding period would help reduce market manipulation. Given this recommendation, some market participants were of thew view that the period for LTCG exemption might be raised from one year to two years. “It is possible that the period of holding may be increased to 2 years, to accord parity to listed and unlisted stock,” conceded Gupta. But most of the investor community is at odds with this view. “If LTCG Tax is imposed in the purest form, the markets could correct 3% to 5%. I doubt whether the government will think about doing something on those lines,” said a broker requesting anonymity.
UR Bhat managing director of Dalton Capital Advisors said the government’s intent is clearly to bring down taxation levels while, at the same time, reducing myriad exemptions. However, the government is not likely to do it in the 2018 budget because it is the last budget before the federal elections. They are most likely to do it in the first budget of a possible new term in 2019. “Any tinkering with the holding period or taxation of long-term capital gains will most likely result in a sell-off in the market, which any government would not want in the run-up to an election,” Bhat said. LTCG on the sale of listed securities is not taxed in India since July 2004. These are profits on the sale of listed shares on a stock exchange platform after a holding period of at least a year. If the shares are unlisted, then LTCG exemption is given if the holding period is more than two years. Short-term capital gains (STCG) are profits on the sale of shares held for less than 12 months, and such gains are taxed at 15%. Within 6 months of the removal of LTCGT in 2004, the average traded volumes in the cash segment of both the exchanges together increased by about 75%. Some of this gain may be attributed to the positive sentiment created by the move.