For more equity: on long-term capital gains tax 

For more equity: on long-term capital gains tax 

Context:

  • The Union Budget 2018-19 announced the reintroduction of the long-term capital gains (LTCG) tax for stock market investors.

LTCC:

  • The gains would be computed based on the share price on January 31
  • Long-term capital gains exceeding 1 lakh would be taxed at 10% without the benefit of indexation.
  •  Indexation refers to adjusting the gains against inflation, which brings down the real quantum of gains
  •  The Centre has justified the new tax arguing that it helps avoid the erosion of its tax base and levels the playing field between financial assets and investment in manufacturing.

Background:

  • In 2004-5, as part of its attempts to courage long-term investment in equity shares, the government had abolished LTCG tax replacing it with securities transaction tax(STT).

Rationale behind introduction:

  • LTCC would see investors paying 10% tax on the gains made by selling shares even after holding them for more than a year.
  •  Help avoid tax base erosion.
  • Ensure level playing field b/w financial assets and investment in manufacturing.

Concern areas:

  • Whether raising the tax burden on equities, rather than lowering the tax and other barriers to investing in alternative assets, is the right way to address the distortionary effect of taxes.
  • The smaller differential between short and long-term capital gains tax itself will discourage the long-term holding of stocks in favour of short-term trading activity.
  • It is likely to discourage to some extent the growing culture of investing in equities for the long run.
  •  Being the only country in the world to impose both the STT and LTCG, India is also likely to become a little less attractive to foreign investors
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