Remove long-term capital gains tax exemption: BSE

Bourse says exchequer could be losing Rs 49,000 cr a year

One of the most important stock market participants is making a case for reinstating of long-term capital gains (LTCG) tax on equity investments. 

According to sources, the BSE has made a presentation to the Union finance ministry that LTCG exemptions cause huge revenue loss to the government and also lead to market manipulation. LTCG is tax-exempt on the sale of listed securities, since 2005. This had made India one of the most liberal markets in this regard, the BSE said in a presentation last Friday. 

LTCG are profits on sale of shares on a stock exchange platform after a holding period of at least a year. Short-term capital gains (STCG) are profits on sale of shares held for less than 12 months; these are taxed at a flat 15 per cent. 

“Since India has one of the lowest tax collection to GDP (gross domestic product) ratio within G-20 countries, every effort must be taken to shore up the revenue collection. LTCG taxation could help,” it had reportedly said. The exchange pegs the loss to the exchequer at Rs 49,000 crore annually for not charging LTCG.

“LTCG exemption is a great concept. It is aimed at encouraging long-term equity investments, necessary for the economy. There have, regrettably, been some instances of its misuse. Instead of a blanket abolition, it would be better to fine-tune the tax provisions to encourage its bona fide use,” said Prithvi Haldea, founder, Prime Database.

“A lot of investors have made good returns from the market in the past year. However, the tax outgo from these investors is barely anything, thanks to the exemption under LTCG. There is definitely a case to look into this,” said a senior legal expert, asking not to be named.

Market players said re-introduction of LTCG, however, could trigger a sell-off in the stock markets.  In the run-up to last year’s Union Budget, investors were worried at adverse tax changes for capital market investors. The government, however, had not tinkered with that structure. 

“Talk of LTCG tax has been doing the rounds in the past few years. It remains to be seen whether the government will muster the courage to do it, as this will be a huge market disruptor. After demonetisation and the GST (goods and services tax) roll-out, the government would like to play safe till the 2019 election,” said the official cited earlier. Unscrupulous entities have also been using this tax benefit to launder money by dealing in shell company shares. In early August, the markets regulator had suspended trading in 331 suspected shell companies identified by the ministry of corporate affairs. BSE says the LTCG leeway opens the door for tax arbitrage and manipulation. 

Among the other suggestions from the bourse are curbs on derivatives trading to ensure it is largely used for the purpose of hedging. The exchange has also raised concerns over manipulation of stock prices through algorithm trading.