Run-up to Budget 2020-21: On Govt table — Do away with or prune tax on long term capital gains

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Shared News| January 4, 2020 9:19:20 am
LTCG was reintroduced after a gap of 14 years and the Finance Minister had proposed that all gains up to January-end 2018 would be grandfathered. (File photo, source: PTI)

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TO PROMOTE long-term flows into equities, the Finance Ministry is considering a partial or complete rollback of the long term capital gains (LTCG) tax on shares of listed companies. The Prime Minister’s Office and the Finance Ministry have held a series of discussions on the issue in the run-up to the Budget, two senior government officials told The Indian Express.

Sections within the government as well as leading market players have noted that LTCG has not yielded much in terms of revenue. The tax was imposed after direct intervention by Prime Minister Narendra Modi seeking financial market players to make a fair contribution for nation building. It was reintroduced after a gap of 14 years and the Finance Minister had proposed that all gains up to January-end 2018 would be grandfathered.

Will promote equity culture
After a gap of 14 years, the government decided to impose a 10 per cent tax on long-term capital gains arising from sale of shares in listed companies and equity-oriented mutual funds. It has not yielded much in revenues, but has instead reduced the incentive for holding stocks over longer periods. Doing away with the tax will give an impetus to the equity investment culture in the country.

If not a complete rollback, it was possible that the tax on LTCG on sale of equity shares could be reduced to 5 per cent from 10 per cent now. An announcement is expected in the Budget for 2020-21. In the Budget announced on February 1, 2018, then Finance Minister Arun Jaitley imposed the 10 per cent tax on capital gains exceeding Rs 1 lakh per year arising from transfer of listed shares without any indexation benefit.

Market players say the re-introduction of the tax is “an avoidable irritant” in the structural growth of the Indian equities market. While it did not contribute much to the excheuquer, it led to hot money flows into the market. “As of today, there is not much incentive to hold equities for the long term, as the LTCG is 10 per cent, while the tax on short term capital gains (STCG) is 15 per cent. This needs to be corrected to promote long term equity culture and prevent money chasing short-term gains,” one of the government officials familiar with the discussions said.

Market data shows that out of the 2,280 listed entities at the Bombay Stock Exchange, only 320 companies have generated positive returns. The remaining 1,960 stocks have generated a negative return for investors. “Performance of stocks over the last two years shows that the government would not have generated any meaningful revenue on account of LTCG tax. It is unproductive and an irritant,” said the CEO of a leading mutual fund.

The Finance Ministry did not respond to queries seeking comments.

At a SEBI event on December 24, 2016, Prime Minister Modi had highlighted the government’s agenda to raise taxes from the stock market. “.those who profit from financial markets must make a fair contribution to nation-building through taxes. For various reasons, the contribution of tax from those who make money on the markets has been low. To some extent, it may be due to illegal activities and fraud. To stop this, SEBI has to be extremely vigilant. To some extent, the low contribution of taxes may also be due to the structure of our tax laws,” he had said.

“Low or zero tax rate is given to certain types of financial income. I call upon you to think about the contribution of market participants to the exchequer. We should consider methods for increasing it in a fair, efficient and transparent way,” Modi said. The LTCG was announced a year later.