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