For stock market investors, the biggest announcement in the Union Budget 2018-19 was the reintroduction of the long-term capital gains (LTCG) tax that would see investors paying 10% tax on the gains made by selling shares even after holding them for more than a year.
However, to offer a partial relief to investors, the government has proposed that all gains up to January 31 would be grandfathered. In other words, the gains would be computed based on the share price on January 31.
“The return on investment in equity is already quite attractive even without tax exemption. There is, therefore, a strong case for bringing long-term capital gains from listed equities in the tax net,” said Finance Minister Arun Jaitley.
Mr. Jaitley has said that long-term capital gains exceeding ₹1 lakh would be taxed at 10% without the benefit of indexation. Indexation refers to adjusting the gains against inflation, which brings down the real quantum of gains.
Way back in 2004-05, as part of its attempts to encourage long-term investment in equity shares, the government had abolished LTCG tax replacing it with securities transaction tax (STT). While the Centre has brought back LTCG, it has, however, decided against abolishing or reducing the STT rates, which, many feel, is a case of double taxation.
Finance Secretary Hasmukh Adhia, while addressing the media, explained that the purpose of STT and LTCG is different and that the former only helps the government in keeping a track of equity transactions without any windfall revenue collection.
“So, this [LTCG] is not going to at all affect the sentiments of the market. The market has absorbed it very well so we do not see any negative emotions, neither from domestic investors or from foreign investors,” he said while adding that the government had collected ₹ 9,000 crore through STT.
The issue of LTCG tax replacing STT was raised by a large section of market participants this year with some even highlighting that the government had lost revenue of over ₹ 3 lakh crore by withdrawing LTCG in 2004-05.
‘Back in new form’
“The much anticipated introduction of LTCG is now back with a new avatar. As we know in tax legislation, this could only get worse over a period of time with every successive budget diluting the original commitment of taxing long-term gains,” said Milind Kothari, Managing Partner, BDO India.
According to the finance minister, the total amount of exempted capital gains from listed shares and units is around ₹3.67 lakh crore as per returns filed for the assessment year 2017-18.
“Introduction of LTCG tax on equity gain exceeding ₹ 1 Lakh at 10% without indexation will impact equity market and the corpus which people need to create for meeting their financial and life goals,” said Sanjay Sanghvi, Partner, Khaitan & Co.
Interestingly, in a letter written in 2015 to the then joint secretary of the ministry of finance, BSE had made a similar proposal for bringing back LTCG. The issue of tax evasion through stock exchanges by paying a small STT component instead of LTCG tax has been raised regularly by market participants.
Meanwhile, there is also a view that the proposed structure of LTCG would make it more lucrative for entities to trade through tax treaty countries such as Singapore and Mauritius till the time the treaty benefits exist.
“The change will increase the attractiveness of investment in equity shares from certain treaty countries,” said Tejas Desai, Tax Partner, Financial Services, EY India.
“The Singapore/Mauritius treaties provide protection for grandfathered positions in equities plus a reduced tax (now 5%) for purchases post April 1,2017 (transitory relief provisions) on such long term capital gains,” he added.