Unscrupulous entities have also been using this tax benefit to launder money by dealing in shell company shares. In early August, the markets regulator had suspended trading in 331 suspected shell companies identified by the ministry of corporate affairs. BSE says the LTCG leeway opens the door for tax arbitrage and manipulation
One of the most important stock market participants is making a case for reinstating of long-term capital gains (LTCG) tax on equity investments.
According to sources, the BSE has made a presentation to the Union finance ministry that LTCG exemptions cause huge revenue loss to the government and also lead to market manipulation. LTCG is tax-exempt on the sale of listed securities, since 2005. This had made India one of the most liberal markets in this regard, the BSE said in a presentation last Friday.
LTCG are profits on sale of shares on a stock exchange platform after a holding period of at least a year. Short-term capital gains (STCG) are profits on sale of shares held for less than 12 months; these are taxed at a flat 15 per cent.
“Since India has one of the lowest tax collection to GDP (gross domestic product) ratio within G-20 countries, every effort must be taken to shore up the revenue collection. LTCG taxation could help,” it had reportedly said. The exchange pegs the loss to the exchequer at Rs 49,000 crore annually for not charging LTCG.
“LTCG exemption is a great concept. It is aimed at encouraging long-term equity investments, necessary for the economy. There have, regrettably, been some instances of its misuse. Instead of a blanket abolition, it would be better to fine-tune the tax provisions to encourage its bona fide use,” said Prithvi Haldea, founder, Prime Database.
“A lot of investors have made good returns from the market in the past year. However, the tax outgo from these investors is barely anything, thanks to the exemption under LTCG. There is definitely a case to look into this,” said a senior legal expert, asking not to be named.
Market players said re-introduction of LTCG, however, could trigger a sell-off in the stock markets. In the run-up to last year’s Union Budget, investors were worried at adverse tax changes for capital market investors. The government, however, had not tinkered with that structure.
“Talk of LTCG tax has been doing the rounds in the past few years. It remains to be seen whether the government will muster the courage to do it, as this will be a huge market disruptor. After demonetisation and the GST (goods and services tax) roll-out, the government would like to play safe till the 2019 election,” said the official cited earlier.
Unscrupulous entities have also been using this tax benefit to launder money by dealing in shell company shares. In early August, the markets regulator had suspended trading in 331 suspected shell companies identified by the ministry of corporate affairs. BSE says the LTCG leeway opens the door for tax arbitrage and manipulation.
Among the other suggestions from the bourse are curbs on derivatives trading to ensure it is largely used for the purpose of hedging. The exchange has also raised concerns over manipulation of stock prices through algorithm trading.
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Amend Incometax Act to the effect that loss from Dubious/Shell/Bogus Company will not be allowed to be adjusted under any Head of Income. Similarly Income/Capital Gains earned from transfer of shares of such companies will be taxed as normal Business Income. List of such dubious/shell companies should be given in the SCHEDULE to the Act; and all the Appellate authorities including High Courts/Supreme Court should be barred to entertain any plea in relation to correctness of any company mentioned in the Schedule. Power to declare any company as dubious/ shell/ bogus/ fictitious should be given to SEBI .
I don’t agree with this at all. If some unscrupulous people are using this tax then please go after them by all means but that can’t be an excuse for taxing the long term investors. If this tax goes through then there will be huge sell off at the cost of domestic investors who have just recently started investing through mutual funds. It will be a bad move for Indian economy and stock market would take a big hit. Many retail investors will get hurt who have recently joined the investment community through mutual funds. Also, the exchanges and brokerages have a vested interest in this. This move will increase short term trading volumes that will increase income for exchanges.
We need to take a look at the global situation as well. In coming years, getting the long term capital into India will not remain easy. Agreed that India is a high growth economy but still we have many pain points like lack of policy certainty, unclear policies, legal procedures. Recently US has cut the Corporate Tax rate to historic low levels of around 20% from 35% earlier. This will result in global capital moving back to US and corporations around the globe will start moving capital to US for investment. In that backdrop, India will struggle to get growth capital even with LTCG exemption in place.
Tinkering with the law related to LTCG will also spook the foreign investors who would not like the constant change in important policies. Foreign investors have already been withdrawing money from Indian capital markets for last many months. It may have been because slowly the developed markets are looking better investment destinations. An LTCG tax would accelerate the trend.
There will be huge sell-off once this move is announced as markets are already over-heated and companies are struggling to post earning growth. If this moves goes through then the sell off could be severe and long. Historically, sell off in Capital Markets also affects currency, FDI and GDP growth and private investments. Already commodity prices (particularly crude oil) have started going up and in that backdrop we don’t want a flight of foreign capital to further damage the trade deficit.
This move will mostly affect the mood of retail investors who have started investing in equities only very recently through mutual funds. They will be disheartened if there is a big and long down move in capital markets. Historically retail investors tend to join the markets when they are high and sell out when they start falling. Currently the trade figures show that Indian domestic investors are keeping markets at record high levels and FIIs have been withdrawing money. Once domestic investors also start selling, it will cause a bigger move downwards.
Our problem is that number of people who are taxed is low; I don’t believe that absolute tax collection figures are low.
While developed economies are trying to strengthen their economies by giving tax stimulus we should not try to kill the already fragile growth in economy by over taxation. The US is going towards a high fiscal deficit low taxation regime. In that backdrop, it would be wise to consider a relatively loose fiscal deficit policy instead of over taxation.
If the government still feels that it has to go for LTCG, then there can be certain steps taken to mitigate the impact and still achieve the end results.
I would suggest that government provides an annual exemption of around a crore per family to cushion the blow to the retail investors. The figure is small enough so that unscrupulous entities will not benefit from it while genuine investors will be protected. Also, foreign entities could be taxed at a higher rate than domestic retails entities (Mutual Funds/or direct retail participation). Lastly, the government should try to understand better the motives of exchanges in suggesting this move. I believe that exchanges will benefit if LTCG tax is imposed as it will encourage the short term trading and increase the trading volumes for exchanges. This becomes significant in the light of listing of BSE as companies tend to become more profit driven after listing.
It appears that you are living in FOOLS PARADISE ? For you one crore is nothing ?
The issue is to be seen from a larger perspective – what happens to the Indian economy if there is a shift from Entrepreneurship to job seekers? This will help in deciding whether to tax equity investements or not? Inability to enforce correct behaviour needs better vigil mechanism but changing policy needs to be considering the bigger picture