Long-term capital gains tax unlikely to hurt bull market sentiment ...

Talks of long-term capital gains tax (LTCG) has equity markets worried, but sentiments may not be impacted purely due to its imposition. A key reason for LTCG not adversely affecting markets is that it may not be a retrospective tax. More, there is a sense that government has been taking extra care not to spoil equity market sentiment and hence, it may not impose LTCG in a manner that could hit market sentiments, experts said.

Imposition of LTCG is being actively discussed by the government and an announcement could be likely in the Budget on February 1. There are several options that are being discussed by officials working on preparing the Budget, two sources close to the development told BusinessLine .

A key option is to keep the LTCG tax rate low between 5-10 per cent and raise it later post-2019 national elections. It is the same way the then Finance Minister P Chidambaram introduced short-term capital gains tax at 10 per cent and later raised it to 15 per cent. There is a belief that if LTCG is not retrospective and introduced at a lower rate, it may not hurt investor sentiment. The idea is to protect past investments and save the markets from negative cues, the source said.

The sources further said the government was eager to bring the tax as it wanted to build a narrative ahead of the elections that it was ready to tax wealthy traders and even foreign portfolio investors (FPIs). How much revenue LTCG may generate in the initial years is still being debated within the government and tax authority circles. Most FPIs pay very little or no tax as they are exempt from short-term tax on derivatives if their funds come via treaty country.

Short-term capital gains from equity holding for less than a year are taxed at 15 per cent. Gains from shares sold after a year, known as LTCG, have been exempt from tax since 2005. The LTCG exemption was intended to promote equity investments, but the Direct Taxes Code (DTC) framework, re-drafted in 2009, proposed an elimination of this distinction.

Another option being discussed by the government this year is to raise the equity holding period for LTCG to three years. It is the second time in less than seven years that DTC is being re-written.

In 2012, the new DTC was implemented, but to avoid hurting stock market sentiments, the UPA government decided against tweaking the capital gains tax structure. So far, the NDA government too has avoided the proposal. But since 2018 will mark the last full Budget before the 2019 General Elections, the government wants to leverage the stock market buoyancy to fine-tune the capital gains tax structure. Around ₹30,000-40,000 crore worth of monthly inflows in domestic funds is giving government the much-need leverage against FPI blackmail, experts say.

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