LTCG Tax on Equity is Only Logical

What is the issue?

• 10% LTCG tax has caused angst among many investors and has also contributed to the recent share market weakness.
• But this move is justified as there is no need to accord preferential treatment for share capital as opposed to debt instruments.

Why should LTCG on Equity be taxed?

• The recent budget slapped a 10% tax on long-term capital gains above Rs. 1 lakh on listed equity shares and equity mutual funds.
• There is little logic in why equity instruments should be tax exempted, when debt instruments such as bank fixed deposits, don’t have exemptions.
• Notably, the latter is what forms the mainstay of the population.
• Also, equity has been delivering massive gains to investors over the past few years, even as debt investors are staring at whittled-down returns.
• Further, the finance minister noted that tax returns filed in 2017-18 indicate that LTCG tax could significantly boost revenues.

On what grounds is concept of LTCG on equity opposed?

• Some vouch that equity has higher risks and hence deserves tax exemptions.
• Further, some reason that tax breaks will help in promoting equity instruments, which are currently still very restricted in India. 
• But investors ought to know what they are getting into and align their return expectations accordingly.
• While the introduction of LTCG Tax has caused disturbance in the short-term, things will slowly but surely adjust to the new-normal.

What are some of the teething issues with the current proposal?

• STT - One major complain from investors is that while LTCG tax has been re-introduced, the securities transaction tax (STT) still remains.
• Notably, STT was introduced in 2004 in tandem to replace the tax on LTCG and hence should ideally be retracted now.
• In any case, STT revenue was quite small, at less than Rs. 10,000 crores a year.
• Inflation Indexing - LTCG on equity is taxed at 10%, which is much lower than the 20% LTCG tax on other asset - like gold, real estate and debt funds.
• But these other assets are inflation indexed, which helps them to adjust gains by accounting for inflation effects, which helps in reducing taxes.
• As cost indexation is a fair principle that results in taxing only real, inflation-adjusted returns, LTCG on equity too needs to be inflation indexed.
• This will protect investors against high inflation risks and needs to be considered even if it means increasing the tax rate.
• STCG Tax - “Short-Term Capital Gains Tax” on equity (which covers stocks held for 12 months or less), is still being taxed at a mere 15%.  
• This too is much lower than the tax on short-term gains on many other asset classes and hence needs to be hiked.
• Anomalies - While the LTCGs on equity are now taxed, capital gains on “Insurance-cum-Investment Products” continue to be exempted.   
• As this would give the latter an unfair advantage and could distort the capital market patterns, it needs to be corrected.

Source: Business Line