Long Term Capital Gains Tax: Few Words

Photo: The Hindu Business Line

BSE Sensex and NSE’s Nifty 50 closed over 2% lower on last Friday, losing most since November 2016 as as investors were felt disappointed after the NDA government proposed a  10% long-term capital gains (LTCG) tax on equity gains above Rs.1 lakh. Investors were also worried after the finance minister revised upward its fiscal deficit target.

For the week, booth the indices fell 2.7% each. BSE Sensex closed lower by 839.91 points at 35,066.75, while the Nifty 50 fell 256.30 points to close at 10,760.60 on last Friday.

The Sensex plunged over 200 points on Thursday also as the Finance Minister read out the provision of bringing back the long-term capital gains tax on equity shares and equity-oriented mutual funds in the Budget session.

But stocks were soon on their feet. The arguments put forth were, “this was expected anyway and is already factored in to stock prices,” “the grandfathering clause helps protect the profits so far,” “tomorrow is another day,” and so on. However, that was absent on last Friday, after the NDA government's UNHOLY move to bring down a rising share market.

These rules come into force from April 1, 2019 and will apply to the assessment year 2019-20 and subsequent assessment years. So sale of shares held for more than one year, executed after April 1, 2018 will be taxed at 10%.

The FM, in other words, has given investors a one-time chance, to lock in to their profits now, and escape LTCG on profits made so far, till the prescribed date.

Stocks have been soaring higher over the past 12 months on poor fundamentals, taking valuations to crazy levels. I had already mentioned in one of the my posts that unless the government slams the brakes, the markets are likely to remain crazy. 

Indian markets do not have much depth and hence a small push can cause a steep sell-off of at least 10% to 20%. In such a pessimistic scenario, many investors might want to book their long-term gains, ahead of April 1, to avoid paying 10% tax; when these rules come into force. 

Even if stock prices rally higher from these levels, investors will sell, to avoid tax on the profit made from February 1 to end of March. So effectively, Arun Jaitley has put some sort of roof, on this rally; at least for the next few months.

The Rs.1 lakh limit for taxing LTCG is not likely to help most investors as their portfolio values have swelled with the market rally. Moreover, there are hardly any  small retail investors left, as the government failed to provide any incentive to this community -- most of the traders are either compulsory jobbers or are rich, with institutions taking a major role. 

Under existing provisions, where the total income of a Foreign Institutional Investor (FII) includes income by way of long-term capital gains arising from the transfer of certain securities, such capital gains is chargeable to tax at the rate of 10%. But long-term capital gains arising from transfer of equity or equity-oriented fund or a unit of business trusts was so far exempt from income-tax.

The Budget has stated that as in the case of domestic investors, the FIIs will also be liable to tax on such long-term capital gains only in respect of amount of such gains exceeding one lakh rupees.

The FIIs are unlikely to take the new laws in good spirit. 

Most market participants said the introduction of the long-term capital tax gains tax was as expected. However, they welcomed the grandfathering provision, and felt it would act as a soothing factor. Hence, the decision to levy LTCG on equity at the rate of 10% is not surprising and is unlikely to have too adverse impact on the markets.

The equities still remains as the most attractive asset class from a taxation perspective since the holding period to be eligible for LTCG on most other asset classes is three years. The rationalization of LTCG as expected though will create negative on sentiments in the short term but robust ROE  is likely to absorb this 10%, if corporate earnings growth happen as expected.

However, I am having a gut feeling that a large chunk of money will now start to shift slowly towards other asset classes like Real Estate and Gold from equities and mutual funds, for the reasons best known to all of you...... 😄😄😄😄

In the longer term, I think taxing long term capital gains is healthy for the overall economy because according to a government spokesperson: in the first year (2018-19), the NDA government is likely to mop up Rs.20,000 crore (from long term capital gain tax) due to grandfathering. Next year (2019-20) onward, it would be about Rs.40,000 crore.

This future spending by the government, is expected to give a push to the demand or revive the now moribund demand cycle in the Indian economy; though  the inflation fear lurks, due to excessive money coming in the system in the short term. 

Many analysts are of the opinion that other than a knee-jerk reaction, equity market will not be impacted in the medium and the long term as it is still the only real investment opportunity available.

FII investments may be affected in the short run as the issue of tax compliance come up which increases operational cost. Likewise mutual funds may see a brief impact but the grandfathering till 31st January. The real disappointment was the continuation of STT along with LTCG, logically only one should be there.

The Finance Secretary Hasmukh Adhia recently said: This is the first year when we started asking for reports on this. We have got startling Rs 3.76 lakh crore being reported as exempted income. Isn't that too much? Just imagine you as salaried class would have earned this much income, you pay 30% for your toil.  

But its't clear to me, why the government is mixing income tax with capital gains tax, throwing a surreal reason. Besides, the NDA government's mantra to tax the hard working RICH COMMUNITY to feed the poor will surely antagonize a section of the voters. 

In this context, I would like to highlight  two very important issues here:

#The 1st  Class season tickets of railways in Mumbai's suburban railway system is already around 4x times the 2nd class. The question is who travels in the 1st class? Mostly those in Rs.20,000-25000 category -- with astronomical house rents and living style, this amount of monthly salary is not too much in a metropolitan city like Bombay. This has  definitely pinched the middle class.

#In last November, the Goods and Services Tax Council lowered the tax rate for restaurants (barring those located in luxury hotels) to 5%; but did away with input tax credit in the restaurant business. Under input tax credit, businesses can claim an offset on the tax they pay on inputs against the tax they pay to the government on final products. But after this decision, a restaurant is no longer entitled to claim input tax credit on the food items it uses as raw material.. Also, in case of luxury dining the GST is still ~18%. Restaurants located in high-rent areas – which attract a high Goods and Services Tax rate of 18% on commercial rents hereto has been made the greatest scapegoats too feed the poor. 

Another interesting point is that: in all these so-called reforms of the government, the HINDU GENERAL CASTE, whose history in struggle for Independence of India is etched in RED LETTERS, has been quietly left out from the process. 

But having said, we cannot also expected too much from the Congress and the Leftists either; as their earlier activities had clearly indicated similar motives to eliminate the poor and downtrodden in the GENERAL CASTE masses from much of the government incentives. 

Though pungent, it might sound, but this is how the politics in India has shaped-up post Independence of India, with Dr.B R Ambedkar's "Hulla-Gulla" for caste based reservations, followed by religion based.

In his writings, Dr BR Ambekar unraveled an ideological link between Manu who inspired Nietzsche, who in turn inspired Hitler, who in turn (along with Mussolini) inspired the most revered Manuwadis of the Hindu Mahasabha and the RSS: Balakrishna Shivram Moonje, Keshav Baliram Hedgewar and Madhav Sadashiv Golwalkar.

It is most surprising that while the NDA government and their associates are vocal about the atrocities of Islamic and other invaders, they are mum about "Bharat Ratna" & Chairman of the Drafting Committee of the Indian Constitution of the Dr.B R Ambedkar's virulent anti--Hindu diatribes, especially against the Brahmins and Vaishyas (Bania community) his take on "Dalits" who fought for the British to welcome them to India. 

But it seems from some of my Internet based research that more than than Dr.B R Ambedkar it is his blind followers and the Indian media who had tried to vilify the two India communities the most: The Brahmins and the Banias (Vaishyas). 

I feel it would not be an exaggeration to mention here that after Dr.Arun Shourie challenged Dr Ambedkar's contribution to Indian Independence through his book "Worshipping False Gods" he was left out by the Narendra Modi, an OBC (but this Gujarati community is known to be rich and prosperous) in all his cabinet reshuffles. 

Rediff.com wrote:

There is not one instance, not one single, solitary instance in which Ambedkar participated in any activity connected with that struggle to free the country. Quite the contrary--at every possible turn he opposed the campaigns of the National Movement, at every setback to the Movement he was among those cheering the failure.

Thus, while the years culminated in the country's Independence, in Ambedkar's case they culminated in his becoming a member of the Viceroy's Council, that is -- to use the current terms -- a Minister in the British Cabinet in India.

The writings of Ambedkar following the same pattern. The Maharashtra government has by now published 14 volumes of the speeches and writings of Ambedkar. These cover 9,996 pages. Volumes up to the 12th contain his speeches and writing up to 1946. These extend to 7,371 pages. You would be hard put to find one article, one speech, one passage in which Ambedkar can be seen even by inference to be arguing for India's Independence. Quite the contrary.

Pause for a minute and read the following:

All me to say that the British have a moral responsibility towards the scheduled castes. They may have moral responsibilities towards all minorities. But it can never transcend the moral responsibility which rests on them in respect of the untouchables. It is a pity how few Britishers are aware of it and how fewer are prepared to discharge it. British rule in India owes its very existence to the help rendered by the untouchables. Many Britishers think that India was conquered by the Clives, Hastings, Coots and so on. Nothing can be a greater mistake. India was conquered by an army of Indians and the Indians who formed the army were all untouchables. British rule in India would have been impossible if the untouchables had not helped the British to conquer India. Take the Battle of Plassey which laid the beginning of British rule or the battle of Kirkee which completed the conquest of India. In both these fateful battles the soldiers who fought for the British were all untouchables...Who is pleading thus to whom? It is B R Ambedkar writing on 14 May 1946 to a member of the (British) Cabinet Mission, A V Alexander. Nor was this a one-of slip, an arrangement crafted just for the occasion. Indeed, so long as the British were ruling over India, far from trying to hide such views, Ambedkar would lose no opportunity to advertise them, and to advertise what he had been doing to ensure that they came to prevail in practice. 

Therefore it seems, the NDA government like most of its adversaries, is not bothered of a poor GENERAL CASTE BUSINESSMAN unlike its ATTITUDE towards a Businessman from the Dalit or OBC Groups. 

It would not be an exaggeration to mention here that even the Jains, whose names hardly comes in the freedom struggle gets more governmental support than the GENERAL CASTE HINDUS. This is the biggest lacuna, post independence governance of India. 

I am sure that this TAX TERRORISM and other BIZARRE methods to fill the government coffers by employing the formula: 'Tax Rich hard to FEED the Poor", will be used for generating votes, through schemes directed mostly to the Minorities and SC/ST/OBCs, part of the population. 

The General Caste (from all Religions) should therefore, now think seriously as how to extract their dues from the government's collection of taxes which had squeezed them so hard......because how much strange it looks, the NDA government is not bothered about the well-being of the POOR and DOWNTRODDEN from the GENERAL CASTE and has hereto kept them out from the special groups, meant for upliftment and other benefits.

Note: 
I don't have anything against the SC/ST/OBC and Minorities in India. I feel the vulnerable among them need center's support and I wholeheartedly welcome this view. But then assistance ONLY in the name of CASTE, RELIGION, GENDER (women's reservation bill, anti-men laws, etc) and the like, without taking into account other socio-economic factors, is a dangerous concept in a diverse country like India. 

It is therefore, to be understood that I am only speaking about some typical birth based reservations in India and its fall out among the general population. Unfortunately, it is the government of the day, who is segregating the masses not in terms of a general criterion, but on the basis of where he/she was BORN -- aren't we REVERTING back to the Medieval Period ?

I hope you would also agree with me, that POOR and DOWNTRODDEN from any community cutting across CASTE, RELIGION and other such parochial parameters, should be bolstered so that India grows holistically. 

The Onus is therefore on you, my fellow Indians, to raise the pitch of your voices against the CASTE, CREED, RELIGION and GENDER based discriminations, undertaken by the successive governments in India, so that it reaches Delhi and the center is forced to act on the same. 
Bibliography:
#The Hindu Businessline,
#The Economic Times,
#Live Mint, 
#MoneyControl.com and other sources from the Internet.