Global markets creating a ripple effect: Adhia

According to Finance Secretary Hasmukh Adhia, the Indian stock markets continue to fall owing to a global shake-up, as the correction in the equity markets across the world creates a ripple effect.

"What happened on February 2nd and 5th was mainly because of the global shake-up that is happening. If I give you the figures of what is the percentage decline in the global markets, from January 31 close till February 5 close, German Index DAX declined by 3.8 percent; London Exchange FTSE declined by 2.63 percent; Dow Jones (America) by 6.89 percent; NASDAQ 5.99 percent, in three sessions. Even the Hang Seng (Hong Kong) and NIKKEI (Japan) declined by 1.95 percent and 1.8 percent respectively. As against that, Nifty came down by 3.2 percent, and Sensex by 3.36 percent. The global markets are all associated," he said at an event organised by the Chamber of Commerce.

He also said that the meltdown happened at the wrong time for the government.

"Long-term capital gains (LTCG) tax is hardly an issue. It is only the global scenario which is creating this. Unfortunately, it came at a very wrong time. We couldn't have changed the Budget date, we had to put it in the Budget, but the world global meltdown in the stock exchanges came at a very wrong time for us. We had to time our thing as per the Budget only, the other thing came at a wrong time," he added.

He further clarified the government's intention in levying the tax and explained the rationale behind it.

"There are several classes of investment in the market. You have a choice. You have a choice to put your money in the bank fixed deposit, if you don't want to take any risk, you have a choice of making investment in a start-up, in unlisted equity, where the risk is higher, or you have a choice of investing your extra money into immovable property. Or you can put it either in a mutual fund equity, linked mutual fund, or directly into the equity market. All these options are available for you," he said.

Adhia believes that exempting one set of investors from a tax, was also unfair to the others.

"Out of all these four to five classes of investment, for example, let us take the bank deposit, if you put money in bank deposit, you get eight percent rate of return. If you invest in equity and if you get some capital gain, then so far from 2004 till 2018, there was no tax, If you do this, if you exempt any one out of four to five classes of investment completely out of taxation, then it is very much possible that most people would like to park their funds in such an asset which has got no tax incidence," he added.

If the supply of money is too much for one asset class, naturally the valuations would increase of that particular class because the demand is more and supply is the same. What happens is there is too much of money chasing the same kind of shares and mutual fund so because of extra inflow the asset valuations keep on increasing and sometimes this asset valuation may not be reflecting the fundamental stand of the companies in which they are invested," the finance secretary added.

"It is a potential risk also, particularly to the small investors. So, it was not a good idea to keep any one class completely out of taxation," he concluded.

For the unversed, Finance Minister Arun Jaitley, while presenting this year's Union Budget, introduced LTCG tax, whereby 10 percent tax will be levied on profit exceeding Rs. one lakh made from the sale of shares or equity mutual fund schemes held for over one year.