NEW DELHI:The government isn't worried by the stock market plummeting after the imposition of long-term capital gains (LTCG) tax on shares in the Budget, reasoning that one asset class should not be privileged over another.
Besides, the beneficiaries of the exemption on equities were mostly companies, trusts and limited liability partnerships that were investing in financial markets rather than in more economically productive areas like manufacturing.
"When the Sensex is going at 36,000 points, 500 or 1,000 points here and there is not going to" make a difference, finance secretary Hasmukh Adhia, who is also the revenue secretary, told ET in an interview. The Sensex fell 839.91points, or 2.3%, to close at 35,066.75 on Friday.
Asked if the market reaction worried him, he replied: "I don't think so…In fact, it has rapidly risen in the past month or so. Gain in the last one month is much more than temporary adjustment."
'Exemption to Boost Equity Investments'
Thus far, shares and mutual funds held for more than 12 months had been exempted from capital gains tax while 15% tax was levied on gains made in less than 12 months. In the case of other assets, the shortterm rate is the maximum marginal rate of the tax payer and the holding period is 24 or 36 months. LTCG tax in this case is 20% with an inflation-adjustment benefit.
The economic circumstances in the country were very different when LTCG tax on stocks was removed, Adhia said. That was when the Mauritius and Singapore investment route was a concern.
While domestic investors had to pay capital gains tax, those coming via the above route didn't have to pay the levy. The LTCG exemption created a level playing field, besides which the government genuinely wanted to encourage investments in equity markets.
"Now, Mauritius-Singapore routes are already plugged. Investments by DIIs (domestic institutional investors) and domestic investors is more than FIIs (foreign institutional investors)," Adhia added.
Of the 3.67 lakh crore of longterm capital gains reported, most of it was by corporates, limited liability partnerships and trusts, Adhia said. "So, it is not that individuals were gaining from it. It is largely corporates and large investors. Instead of investing in manufacturing, there was an encouragement to invest directly in markets," he said. "Also, why should we encourage one class of investment over another? Capital gains on equities were kept out of tax net while those on other assets were taxable."
The government expects the tax to raise Rs 20,000 crore.
Continuing with STT
On the issue of continuing with the securities transactions tax (STT) even after the capital gains tax regime had been reinstated, Adhia pointed out that equities still enjoyed some preference.
"When STT was introduced in the place of LTCG, there was no concessional regime in LTCG. There was full LTCG applicable," he said.
If immovable property is sold within two years, then tax on any capital gains could be as high as 30%, the maximum marginal rate. In the case of shares, the short-term rate is 15%. In the case of other asset classes, if sold after two years, the tax rate is 20% against 10% in the case of equities.
"Amount which we are collecting is very small sans any additional compliance burden. It is simply deducted by stock exchanges and paid to us," he said. If the regime is equalised, then there may be no rationale for STT.
"Yes, then there will be no case," he said. "The moment we equalise the long-term and short-term treatment for all asset classes, then there will be no case. We should attempt in that direction so that your investment becomes tax neutral, your choice of investment becomes tax neutral."
On the issue of tax exemption being still available via treaties with France and the Netherlands, Adhia said they were not as comprehensive.
"These are not like the Mauritius tax treaty where there was no tax whether you transfer Rs 1 share or Rs 100 crore share. These have reasonable restrictions. We are working with them for revamp," he said.