The market participants are hoping for some relief on long-term capital gains (LTCG) tax on securities in the full Union Budget which is the Union Finance Minister Nirmala Sitharaman is going to present on 5th July 2019.
The probability of hiking the LTCG tax rate by the Union Finance Minister
Finance minister Nirmala Sitharaman is going to present her first Union Budget on 5th July 2019. The market participants are concerned over the likelihood of a hike in the long term capital gains (LTCG) tax to increase the revenue of the government.
However, the industry leaders hope that FM Nirmala Sitharaman would remove the LTCG tax completely, or cut the rate. Many others are speculating that the exemption limits could be hiked to Rs. 2, 00,000 from Rs. 1, 00,000 earlier.
The increase in LTCG tax is expected to lessen gains in the benchmark indices Sensex as well as Nifty this year. While Sensex has gained 9.55% since the beginning of this year, Nifty is not far behind logging 8.77% rises during the same period.
The Long term capital gains (LTCG) tax has been imposed at a 10% rate on profit above Rs. 1 lakh by the Modi government in Union Budget last year. The shares should have been held for more than one year. Investors in equity-oriented mutual funds were additionally included in the LTCG tax net. Though, all gains up to 31st January 2018 were grandfathered.
The re-introduction of LTCG tax didn’t make a difference in terms of tax revenues, given where the markets have been. However, the Finance Minister might not do away with it completely. It was counter-productive. It is also been anticipated that reversing it would confirm the government was wrong in introducing it, and it may not want to do that.
The Former Finance minister Arun Jaitley re-introduced LTCG tax on gains arising from the transfer of listed equity shares exceeding Rs. 1,00,000 at 10%, without allowing any indexation benefit. However, all gains up to 31st January 2018 were grandfathered. This tax was re-introduced after a gap of 14 years.
The government had stated that the amount of income earned from the stock markets that are exempted from this tax works out to a whopping Rs. 3.76 lakh crore which would translate into a tax collection to the tune of Rs. 37,000 crore going ahead After the announcement.
Argument by the Market participant concerning the hike in the LTCG tax rate by the government
One year on, the market participants are yet to come to terms with the levy. However, the market participants in the D-Street argue that the layered taxation regime does not bode well for capital markets. It was stated that the government should not think of increasing the LTCG from 10% to a higher amount as it would spoil the atmosphere without any collection of tax as the gains have been grandfathered. Also if the Finance Ministry decides to raise tax rates on long-term capital gains (LTCG) once again this time, this can create a lot of negative sentiment amongst the investor community and might impact the markets negatively.
LTCG is the income on which STT (securities transaction tax), which is already being paid. On top of that, the government is charging LTCG tax. It was argued that when you are not paying STT, there is a case for LTCG tax. If someone is paying STT, then it is taxed twice. There must be a change to that effect.
Others agreed and pointed out that multiple tax layers are unhealthy, and not called for. Introducing LTCG was itself a retrograde step. The market participants contended that given the fact that they have excessive or multiple layers of taxes on corporate income, plus they have STT, it is not a good step to have a hike in LTCG tax. They held that the organizations paying dividends from tax-paid income, and then while paying a dividend, they pay a distribution tax. Then, when it reaches the investor, anybody with above Rs. 10 lakh of dividend income is again paying a tax. So, that is an example of multiple layers of taxation. Plus, we have STT and now they have 10 percent LTCG. The market leaders are also praying that even if it is not lifted, at least the FM does not go for a hike in LTCG tax.
While it is not yet clear whether LTCG tax should be 10 percent, 12 percent or 15 percent, but given the overall tax structure, having an LTCG tax itself was a retrograde step, it could be anticipated that it does not go up further.
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