LTCG Tax in Equities: Rob Peter to pay Paul?

Photo: India Infoline

The much anticipated LTCG Tax is now back with a new avatar in finance minister, Arun Jaitley's budget documents. The LTCG of 10% on capital gains of over Rs 1 lakh without the benefit of indexing, will co-exist with the existing securities transaction tax or STT. Needless to say, with the reintroduction of the LTCG and along with the STT, equities will bear the brunt of both taxes together. 

However, since the exemption under long term being abolished, there will be short term sell off in equities to get out or the traders will exit before Rs.1 lakh cap is violated. This is seen positive for the brokerage companies who might see more revenues, due to more and more short term trading. However, on the flip side, it will discourage investors to bring large amounts of legitimate money from other sources into equities. And unless and until there is large scale retail participation, there will not be much improvement in the retail brokerage segment of the equity brokerage houses. 

Hereto, this NDA Government has done very little precious to lift the sentiment of the people towards equity investing  I had mentioned in my earlier write up that as long as the government or the RBI does not slam the brakes, the markets are likely to go crazy. The inevitable has happened as the FM pulled the levers to reign in the equity markets. 

Andy Mukherjee wrote in ET on 30 January, 2018: 

A long-term capital-gains levy on equity can be problematic in a country perennially short of domestic savings. In a frothy stock market, it's like crying "fire" in a crowded room. Profits from selling shares that were bought more than a year earlier has been tax-exempt in India for a decade and a half. It was replaced 14 years ago by an imposition on all securities transactions, regardless of gains or losses. Every year, there's talk of bringing back a capital-gains charge. Speculation is unusually intense ahead of the Feb. 1 federal budget, with Deloitte Touche Tohmatsu India LLP calling capital-gains tweaks "low-hanging fruit." 

This move of taxing long term capital gains, can also be looked upon in another way, as indirect boost to the moribund real estate sector, where illegitimate funds still finds lot of avenues  to enter.  Also, the cap of Rs.1 lakhs is too small for today and cannot be called as a safeguard limit for small investors, especially when many stocks have more than doubled in 52-weeks. 

Another important announcement which the Finance Minister made post his budget speech was that Rs.3.67 lakh crore was the exempted income on long term capital gains in the last assessment year alone, a bulk of which came from large investors. Mr.Jaitley is of the opinion that gains tax, can not only support the health scheme, but also foot the bill for the other major announcement in his budget – minimum support price (MSP) payment to farmers that is 1.5 times the production cost. 

This is thus a positive development for the Agri sector and health insurance companies, apart from the private hospitals, medical equipment makers, and real estate. This scheme is also expected to give a boost to the rural economy.  

Budget 2018 has proposed a tax relief for buyers and sellers of property by allowing it to be valued at up to 5% below circle rates for calculation of stamp duty and capital gains tax. This is likely to revive 2ndary market transactions. 

The Times Now writes: 

#As many as 51 lakh houses in rural areas are to be built in 2018-19. Also, a dedicated Affordable Housing Fund was announced in this Budget. These are the right moves towards achieving the vision of Housing for all by 2022.

#The regional air connectivity scheme to connect 56 unserved airports is a good news for business growth and office space demand in smaller cities, with a natural spinoff demand for housing on the back of job generation.

#Allocation of Rs.1 lakh crore to update education infrastructure over the next four years may result in the development of new education institutes. In addition, if the Government emphasizes more on a definitive student housing policy, a new avenue will open up for the real estate sector.

#The allocation of Rs.5.97 lakh crore on infrastructure spending is a welcome move, though we need a massive push to ensure that the country’s infrastructure meets global standards.

The NDA government continues to boost the affordable housing sector by setting up an affordable housing fund under the umbrella of the Pradhan Mantri Aawas Yojna, which will give impetus to the growth of  companies like Housing Development & Infrastructure Limited or HDIL (Rs.56.60). 

The insurance industry has welcomed the Budget saying the proposals for a national safety net for the poor in particular and the health insurance sector in particular will act as a catalyst to increase health insurance penetration in India. Extending the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJY) and the Pradhan Mantri Suraksha Bima Yojana (PMSBY) is a positive move to bring more people into the insurance ambit, they said. Taking a cue from this we could see a spurt in the share price of Reliance Capital Ltd (Rs.485.90).

Note: I am still recovering from the surgery in gums followed by RCT. I am not able to speak well due to due this episode. Hence, I have kept my mobile phone in switched off mode; as temptations to speak might delay the healing process. My dentist has advised me to speak at little as possible. You can communicate with me, through e-mails, Facebook and Yahoo Messengers.