Central Government has rolled back the exemptions on long term capital gains for investors holding listed securities. According to the Union Budget 2018, all listed shares held for more than one year will be subjected to capital gains tax of ten per cent. Until now, such transactions were exempt from such a levy. In order to soften the blow and prevent any sell-off in the markets, government has exempted any gains made until January 31 from the provisions.
Market participants say re-introduction of long-term capital gains could lead to a significant change in the investment strategies as tax arbitrage between long-term investments and short-term trading has been reduced as shares held for less than a year are currently subject to 15 per cent tax. Experts say markets will show some knee-jerk reaction to the announcement however from a long-term perspective, the impact would be limited.
“Market has been anticipating such an announcement for a long time and hence investors seem to have already factored in the risks. Until now, tax benefits were skewed in favor of listed equities but after the announcement, there would be a more level-playing field between listed shares and the other asset classes including real-estate, bonds and gold,” said Rajesh Gandhi, partner, Deloitte Haskins & Sells.
With this move, the compliance and operational cost for investing in Indian markets would shoot-up for foreign institutional investors (FIIs) as India would be the only country that has dual tax for listed equities i.e capital gains and Securities Transactional Tax (STT). For domestic investors, tax advantage in equity market investments over other asset classes would diminish, experts added.
“The government's move to impose LTCG and the decision to retain the STT will dampen the investor sentiments. While the tax will adversely affect serious investors, who are funding the India Growth Story, it won't have any impact on short-term traders," said K Suresh, National President, ANMI.
This is the first time since 2004 that the government has tinkered with the capital gains tax structure. Government has been mulling changes to the capital gains regime primarily due to two factors. In 2004, the government introduced the benefits on capital gains for listed shares in order to promote the equity investment culture. Further, the government had introduced STT in the same year to compensate any shortfall in tax collection. Despite India being the eighth largest equity market globally, tax revenues for the government from share market has remained marginal due to the exemption. Secondly, several cases of misuse of LTCG have been reported in the last few years where investors used listed firms for legalizing illicit wealth.