Exemption to equities from long-term capital gains (LTCG) tax was leading to higher asset valuations and was posing a potential risk to small investors, Finance Secretary Hasmukh Adhia said on Tuesday.
Explaining the rationale behind reintroduction of long-term capital gains tax after 14 years, Adhia said while long-term investments in all other assets generating returns are taxed, the same in stocks was exempt which was creating distortions as there was a demand-supply mismatch.
"So what happens is too much money is chasing the share and mutual fund. So because of extra inflow, the asset valuation keep on increasing and sometimes the asset valuation may not be reflecting the fundamental strength of the company you are investing."
"It is a potential risk, particularly for small investors. And so it wasn't a good idea to keep one class completely out of taxation," Adhia said at a post-Budget meet held by PHD Chamber.
He said the decline in the key stock market indices is primarily due to global market meltdown over last few days and not due to the imposition of long-term capital gains.
"What happened on February 2 and February 5 was mainly because of global shake-up that was happening. Of course there is a ripple effect of whatever happens in the world on Indian stock market. Most of it is because of the global market otherwise the Sensex and the Nifty would have come down on the first and the second day (of Budget), Adhia said.
He said India still remains an attractive investment options as FIIs were net buyers in Indian equities yesterday.
Adhia said that the ministry appreciates the role of private capital investment in equity markets also the role of financial intermediaries, who are keeping stock market vibrant.
"There is no intention of undermining theirrole in the process," he said.
"When all other factors of production such as wage employment, where after hard labour one gets a salary, are also subject to full taxation, itis not a good idea to keep any one class of investment completely exempt from taxation".
Adhia said an investor has the option to invest in fixed deposits, startup and unlisted equity or immovable property or in an equity-linked mutual fund or directly into equity market.
While all long-term capital gains are taxed, those in equity markets were exempt from the levy since 2004.
"If you exempt anyone out of 4-5 investment class out of taxation then it is very much possible that most people would like to park their funds in such an asset which has no tax incidence and if the supply of money is too much for one asset class naturally the valuation should increase of that particular asset class," he said.
Currently, India imposes a 15 per cent tax on short term capital gains made of the sale of shares within a year of purchase.
The Budget 2018-19 has reintroduced the provision of taxing long-term capital gains after a gap of 14 years.
From April 1, 2018, a10 per cent tax on LTCG of over Rs 1 lakh made on sale of shares. However, all gains made up to January 31, 2018, have been grandfathered -- meaning no tax will be imposed till that date.