BS Number Wise: A case for taxing India's rich on stock market profits

As economic inequality in the country widens, crorepatis pay very little on long-term capital gains

Billionaire Warren Buffett, in a column written more than a decade ago, famously pointed out that he is taxed at a lower rate than his secretary is.

This is because he earned most of his income from stocks. The money he made from the rising value of shares is called capital gains, income from which is often taxed at a rate lower than salaries. Buffett called for higher taxes on the super-rich, noting that he paid 17.4 per cent while his employees on average paid 36 per cent.

India’s capital gains tax is 10 per cent for shares held for more than a year. Is there a case for higher taxes and who would such a step affect? The tax department does not provide a break-up of the assets on which long-term capital gains are declared. Such gains can cover real estate transactions, or debt or even gold. Different tax rates and different definitions of long-term apply depending on the asset. The tax rate on long-term capital gains on shares is relatively more generous.

While the tax data gives only an overall figure for the total long-term capital gains across assets, it does provide a break-up by amount declared and the kind of entity declaring the gains. This provides a sense of who might have to pay more if long-term capital gains tax is increased. An analysis of the latest available tax data shows that individuals account for a minority share of total long-term capital gains declared in assessment year 2018-19 which corresponds to gains made in financial year 2017-18 (FY18). (See chart 1)

The tax department also provides a break-up of declared amounts in broad categories for individuals. Those who earned more than Rs 1 crore annually from long-term capital gains contributed most to the gains individuals declared. They accounted for 58.1 per cent of the total amount in FY18. Individuals earning Rs 10 lakh or less from long-term capital gains accounted for 11.1 per cent of the total gains declared.

The total number of those who earned more than Rs 1 crore annually from long-term capital gains was 8,629. They declared nearly Rs 40,000 crore in such income for FY18, more than double what it was in FY14 (see chart 2).

Brazil, South Africa and China have a higher headline individual capital gains tax rate. These countries have higher per capita income than India. Nigeria, another lower middle-income country like India, has a similar tax rate of 10 per cent (see chart 3).

Economic inequality in India has widened sharply in the pandemic. Whether higher rates of taxation on capital gains, perhaps at the same rate as personal income taxes, can help fund government recovery programs would be an interesting debate.

In the US, where Buffett made his call, lower capital gains taxes still prevail 11 years later.