Rs 400 bn: The windfall govt could have made had LTCG tax come last year

Above assumption has been made on the basis that 10% of the rise in m-cap the past one year was booked

The government would have made a windfall had the tax on long-term capital gains (LTCG) been introduced in last year’s Union Budget. Sharp rally in the equity markets and record mobilization through IPOs during 2017-18, could resulted into gains in excess of Rs 400 billion (Rs 40,000 crore) by certain assumptions.

India’s market capitalisation in the past one year has increased by Rs 40,646 billion (Rs 40.6 lakh crore) between January 31, 2017 and January 31, 2018. Assuming the manner of LTCG implementation would have been the same, the potential LTCG gains for the government translate into Rs 4,064 billion (Rs 4 lakh crore). To be sure, the tax is levied on the gains that are booked and there would always be a question mark on whether the market would have gained as much as it did in the past one year had the tax been imposed. However, given the exuberance in the global market, it isn’t out of place to assume that Indian equities too would have gained even though the tax would have been introduced a year ago. If one assumes around 10 per cent of increase in market value is booked gets booked as long-term gains, it translates into tax outgo of Rs 406 billion (Rs 40,600 crore).
 

		Change in m-cap
	Market cap (Rs bn)	in Rs bn	in %	LTCG collection*
Jan 31, 2017	112,563
Jan 31, 2018	153,210	40,646	36	4,065
Feb 05, 2018	147,957	-5,252	-3	-525
Source: Prime Database; *Potential gains

Secondary share sales through IPOs
	No. of issues	Amt raised (Rs bn)	LTCG collection**

FY18 38 551 55

Buybacks
	No. of issues	Amt acquired (Rs bn)	LTCG collection**
FY18	40	489	49
**Assuming holding period for all shares old was over 12 months

Starting April 1, the centre will levy a 10 per cent tax on LTCG—gains made on shares held for more than a year. Currently, there tax on LTCG is nil. The government has grandfathered earlier investments, by making stock prices on January 31, 2018 as the reference rate for further gains. Interestingly, India’s market cap is down by Rs 5,252 billion (Rs 5.25 lakh crore) since January 31, 2018. In other words, most investors are currently are starting at mark-to-market losses on their investments.

The new tax will also be levied on secondary share sales through IPOs, block deals or those tendered in buybacks. So far in FY18, there have been 38 large secondary share sales in the Indian market worth Rs 551 billion and another 40 buybacks where shares worth Rs 489 crore have been acquired. Some of the big block deals this fiscal include Rs 96 billion worth of share sale in Bharti Airtel by Qatar Foundation or Rs 38 billion worth of share sale by the promoters of InterGlobe Aviation through offer for sale (OFS).

Assuming all the shares sold or tendered were held for more than 12 months, the centre would have collected Rs 104 billion on them in the form of LTCG tax. To be sure, some portion of these shares was sold by the government and hence, the net impact on those cases would be zero.