Stock market crash may make huge dent in LTCG tax collection in FY19

New tax on equities applicable on only 14% shares at the end of first half of FY19

The weakness in the stock market could make a huge dent in collection of long-term capital gains (LTCG) tax introduced this fiscal year. 

Only 14 per cent of the stocks — 244 out of the 1,771 traded on the National Stock Exchange (NSE) — were above their January 31 closing price at the end of the first half of the fiscal year. 

January 31, 2018, is the cut-off date for the so-called grandfathering benefit. In other words, the new tax on equities is applicable on capital gains made after this date. LTCG — gains made after a holding period of a minimum 12 months — are taxed at the rate of 10 per cent on gains in excess of ~100,000 per fiscal year. Gains made within 12 months — termed short-term capital gains — are taxed at 15 per cent. 

Incidentally, January was when the markets — both benchmarks as well as small- and mid-caps — had climbed to their all-time highs. 

Although the Sensex and the Nifty in August managed to top their January levels, it was largely on the back of gains in select heavyweights such as Tata Consultancy Services (TCS) and Reliance Industries (RIL). 

The small- and mid-caps, on the other hand, have been on a downward slope since January. The Nifty Smallcap 100 Index has dropped 36 per cent from its January highs, while Nifty Midcap 100 is down more than 20 per cent. 

The collapse in the market breadth after January has led to shares of 1,500 out of the 1,771 companies listed on the National Stock Exchange slip below their grandfathering price.

To be sure, many of these stocks have traded above their January 31 price after the LTCG came into play. Investors who cashed out during this period would have to pay tax on such gains. However, given the weak trend, it is unlikely the gains would be meaningful, say experts. 

“I don’t think LTCG tax collection in 2018-19 will be significant,” said Rajeev Thakkar, chief investment officer of PPFAS Mutual Fund. 

“The tax was introduced with the view that capital markets participants generate tax-free income.” 

Some of the key stocks that have gained sharply over their January 31 close are Page Industries (up more than 50 per cent), Larsen & Toubro (L&T) Infotech (51 per cent), L&T Technology Services (44 per cent), TCS (40 per cent), and RIL (31 per cent). On the other hand, there are over 400 stocks that have declined more than 50 per cent between January 31 and September 28.

Incidentally, the government could have made windfall gains had LTCG been introduced a year earlier. Almost two-thirds of the stocks listed on the NSE were up between February 2017 and September 2017. Stocks continued to make stellar gains till the end of January. 

Over the next few months, a combination of domestic as well as global factors continued to weigh on the stock prices. Globally, trade tensions, strengthening dollar, and monetary tightening by the US Federal Reserve triggered risk-off bets.

Back home, deteriorating macro fundamentals, with a spike in crude prices coupled with rupee weakness, added to investors’ woes. 

A lot of market players believe LTCG levy is also one of the key factors for a subdued market performance. 

“A combination of factors has weighed on market performance. It is difficult to pinpoint, exactly how much LTCG is to be blamed,” said Thakkar.