Any such changes would be negative for equity investors as they are taxed favourably as compared to debt investors. The report spooked equity investors.
However, Finance Minister Nirmala Sitharaman quickly debunked this rumour. “Wonder where this is come from. Was not even double checked with @FinMinIndia. Pure speculation,” Sitharaman wrote on X, reacting to a tweet made by a news channel claiming that the tax department is planning to impose uniform treatment for all asset classes.
A bigger risk than election results? Once again, the fear of changes in capital gains has been revived. Christopher Wood, the global head of equity strategy at brokerage firm Jefferies, has said any changes in capital gains tax in the upcoming July budget could act as triggers for a near-term correction in Indian markets. He has coupled the possibility of this tax tweak with election results, if negative for the BJP, as two biggest triggers for a correction in the equity market. He has, in fact, said it will be a bigger risk than election results.Also Read: Shock election results, tax tweak may trigger equity correction on Dalal Street: Chris Wood, JefferiesWood, in his popular ‘Greed & Fear’ newsletter, said a repeat of the shock defeat of the BJP-led NDA in 2004 remains “unlikely in the extreme” this time.
“…. a bigger risk to greed & fear for the stock market is an issue domestic fund managers are now discussing. That is whether there are changes in the capital gains tax looming,” said Wood in his weekly note. “The issue here is whether the tax rates will be raised or whether the period to qualify for long-term gains will be extended, or a combination of both.”
“Another proposal being floated would be to increase capital gains tax for retail investors but not for those investing in mutual funds,” he said. Wood said an extension of the minimum period for levying the tax would be better than raising the rates. “The reason that such proposals are apparently under consideration is growing evidence of retail speculation, most particularly in the options market,” he said. “Such paper speculation is unlikely to be viewed as healthy by Modi, or indeed the BJP. ..
“Greed & fear’s probably correct assumption is that the Indian prime minister has a natural suspicion of those making money out of money, most particularly in a zero-sum game like options,” said Wood.
“Modi has always, since his days running the state of Gujarat where he was chief minister for almost 13 years, been focused on the physical manifestations of growth, most importantly the construction of infrastructure.”
Wood has said markets could correct even more than the 17% fall in two sessions after the election results in 2004 in case of shock defeat for the BJP which he, however, thinks is extremely unlikely. But, since he thinks a tweak in capital gains tax could be a bigger trigger for a correction, he may imply that a tax tweak will trigger even more than 17% correction.
Why speculation on capital gains tax?
While Woods is a highly popular equities analyst whose word carries weight with investors, he has offered no sound reason why he thinks the government will tweak the capital gains tax. Why Woods has made his observation could be due to a pervasive thinking that the current capital gains taxation needs to be made less complex.
Currently, if gains from both stocks and equity-oriented mutual funds are booked within one year of holding, investors must pay 15% as short-term capital gains tax (STCG). Long-term capital gains (LTCG) — profits booked beyond one year of holding — are taxed at 10%. But the capital gains taxation varies across different types of capital assets.
In simple terms, capital gains mean any profits or gains arising from sale/ transfer of a ‘capital asset’ which is defined under the Income-tax Act, 1961 (Act). Under the Act, a ‘capital asset’ includes movable assets such as jewellery, archaeological collections and drawings, paintings etc. and immovable assets such as land and building. Shares, securities and units of mutual funds also qualify as movable capital assets. The capital gains tax calculation mechanism for each type of capital asset has its own rules and thus needs careful consideration by the individual taxpayers to correctly determine whether there is a profit or loss on sale of a capital asset and how much tax is payable in case of gains.
While some changes have been made over the years, the structure is still pretty complex and difficult to comply with for a layperson, Shalini Jain, Tax Partner, People Advisory Services, EY India, had written before the interim budget this year. Budget 2023 had taken away the benefit of indexation for the calculation of LTCG on debt mutual funds for investments made on or after April 1, 2023. However, only those debt mutual funds lost this benefit where equity investments did not exceed 35%.
Varied provisions make the whole capital gains tax structure in India rather complicated. The government too has commented in the past that there is a need to simplify this tax structure. This need for simplification frequently triggers speculation before every budget about possible changes in the capital gains tax which may impact equity investors favourably or unfavourably. Yesterday, Helios Capital founder Samir Arora floated a proposal on social media site X to scrap LTCG tax in India.
Also Read: India stock market hits $5 trillion milestone fortnight ahead of Lok Sabha election results
In terms of wealth creation, the ongoing bull run is unprecedented in India’s history. India’s capital markets have witnessed vibrant participation from domestic retail savers, with demat accounts surging to 151 million in March 2024 from 36 million in March 2019. Cumulative domestic equity inflows have amounted to $92.7 billion over the last five years. The total market capitalisation of BSE-listed stocks closed above $5 trillion last week, which made India the fifth country after the US, China, Japan, and Hong Kong whose market caps have crossed the $5-trillion mark. A rising market means more taxes for the government, while higher tax rates or extension in the period to qualify for long-term gains might hit market growth.
Content Source: economictimes.indiatimes.com