Why in news?
The Union government is planning to re-impose a LTCG tax on equity investments.
What are the taxes levied in equity market?
- LTCG -Long term capital gains taxes are levied on profits on sale of shares after a holding period of at least a year.
- In India LTCG is tax-exempt on the sale of listed securities, since 2005, It is aimed at encouraging long-term equity investments.
- STCG - Short Term Capital Gains (STCG) taxes are levied on profits on sale of shares held for less than 12 months, these are taxed at a flat 15 per cent.
- STT -Securities Transaction Tax is levied on every purchase or sale of securities that are listed on the Indian stock exchanges.
- This would include shares, derivatives or equity-oriented mutual funds units.
- STT is deducted at source at the time of the transaction itself.
- In India equity investors are required to pay a securities transaction tax of just 0.10 per cent of the trade value.
What is government’s plan on LTCG?
- Government is considering of removing the distinction between long-term and short-term gains.
- It is considering of stretching the definition of ‘long-term’ for equity investments from one to three years.
- There are also proposals to prospectively impose a moderate LTCG tax on equities after a three-year holding period.
What is the needs for this move?
- Tax exempt of returns on equity investments, usually owned by the creamy layer of investors enjoy concessional tax rates.
- While those on post office instruments or bank deposits by non-creamy investors are taxed at the income-tax slab rates, which is discriminative.
- It is also unfair that equities enjoy a lower rate of short-term capital gains tax 15 per cent, at the same time with just a one-year holding treated as ‘long-term’ (it is three years for other assets).
- Many corporates have used LTCG on penny stocks and shell companies to launder their unaccounted wealth.
- STT was introduced to avoid tax discrimination has significantly upped transaction costs in the Indian market.
- It has raised costs for pass-through vehicles such as mutual funds and pension funds, and not yielded very impressive tax collections.
- Thus re-imposing of LTCG taxes will address tax discrimination issues and also improves tax revenues
What are the prospects of this taxation?
- Unlike the STT (Security transaction taxes) regime, where the investor shells out tax irrespective of profit or a loss, an LTCG regime taxes investor only if his trades prove profitable.
- LTCG tax can also help long-term investors set off their losses in one year against gains in another, a facility not available with STT.
- LTCG for equities could yield better revenues in a bull market, but it would depend on market conditions.
- Any change in LTCG taxation, may trigger some short-term market upheaval, but it is unlikely to drive away domestic or foreign investors from Indian equities.
Source: Business Line
