Budget 2018-19 expectations- LTCG on equity investments

Every year the issue of taxing long term capital gains (LTCG) on equities comes up before the budget. The government buckles and retains this tax exemption leading to a post budget stock market rally.

Currently, if you purchase any shares through a stock exchange you have to pay securities transactions tax (STT). Collections from STT have not shown the kind of buoyancy that might have been expected given that the stock markets have done reasonably well over the past few years. Thus the question of re-introducing LTCG has again come up. LTCG on equity was abolished in 2005.

If you hold any equity share or any equity mutual fund unit for a period of more than 12 months, no LTCG tax is imposed on the gains. If you sell your equity holdings before one year then short term capital gains (STCG) tax at 15% is imposed on the gains.

The expectation is that the government may either increase STT (0.1% currently) or introduce LTCG & abolish STT on shares irrespective of holding period or consider increasing the holding period for equity investments from one year to three years for availing LTCG benefits.

In my opinion the government is most likely to realign the tax structure to make it more equitable across asset classes. In case of property, if the sale takes place after three years the long-term capital gains tax on the sale is NIL. For debt market too, sale before three years attracts tax at individual tax slab of the investor, while after three years LTCG is charged at 20% with indexation benefit. Thus LTCG on equities could also be raised to 3 years. This will allow the government to reap additional tax benefits of taxing short term capital gains for the extended period.

Currently there is a revenue shortfall on account of implementation of Goods and Services Tax (GST). GST collection has been below expectations & the government is under tremendous pressure to boost up its revenue. Fiscal deficit for the first eight months of 2017-18 has reached 112% (Rs 6.12 lakh crore) of the full year’s target of Rs 5.46 lakh crore.

The markets are trading at all-time highs on the back of very strong liquidity from both domestic & foreign investors. As the fiscal deficit is higher than expected, the government will need an extremely supportive capital markets (disinvestment in PSU companies) in FY19 to keep things under control. Hence, introducing LTCG, a move that can dampen long-term market sentiment looks unlikely at this stage.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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