FinMin may review tax regime on long-term capital gains


The finance ministry has been discussing a review of the long-term capital gains (LTCG) taxation regime ahead of the Union Budget 2017-18 that will be presented on February 1, in the backdrop of Prime Minister Narendra Modi’s suggestion of increasing contribution of financial market participants to the exchequer.

Sources said the review may lead to tweaking in the holding period for gains in stocks to qualify as long-term capital gains, even as the government may leave the tax rates unchanged. Currently, if an investor is holding a stock for more than 12 months, it is considered to be a long-term investment. Any long-term gains from transaction in such stocks are exempt from taxes.

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The holding period is likely to be increased, in line with the tweaking that was done in the case of unlisted shares in the previous year’s Budget. In the case of unlisted companies, the Budget 2016-17 has reduced the period for getting benefit of long-term capital gain regime to 2 years from 3 years.

Gains from transactions in shares held for less than 12 months are considered short-term capital gains and are subject to 15 per cent tax.

Market experts say that any plan to impose tax on LTCG would make Indian equity market unattractive to global markets, since long-term gains on stocks sold after 12 months are tax exempt in most jurisdictions.

“Based on feedback from the market participants, there is a view in the government that a rejig in the holding period would be more palatable to global and domestic investors than imposition of capital gains tax,” said a government source.

On December 25, a day after Modi stressed the need for stock market participants paying higher taxes, finance minister Arun Jaitley was
quick to clarify that the government has no intention of imposing any long-term capital gain tax on investments in stock markets.

The head of a leading financial firm also said that after the finance minister’s clarification, it is unlikely that the government will impose a capital gains tax for the long term. “We expect that the government will extend the holding period of equities to qualify for LTCG tax. It is also expected that the government may impose dividend tax on dividend income of less than Rs 10 lakh,” he said.

The review of the LTCG structure is being synchronised with the implementation of the General Anti Avoidance Rules (GAAR), which kick in from April 1. This will ensure that any changes in taxation structure of capital gains apply evenly to the domestic and global investors.

The government has already amended the tax treaties with Mauritius, Cyprus and Singapore, plugging a key loophole exploited by foreign players to save payment of taxes on even short term capital gains on transaction in Indian shares.

Speaking at a Securities and Exchange Board of India (Sebi) event on December 24, Modi clearly highlighted the government’s agenda to raise taxes for the stock market. “…those who profit from financial markets must make a fair contribution to nation-building through taxes. For various reasons, the contribution of tax from those who make money on the markets has been low. To some extent, it may be due to illegal activities and fraud. To stop this, Sebi has to be extremely vigilant. To some extent, the low contribution of taxes may also be due to
the structure of our tax laws,” Modi had said.