Bleeding bourses: Long Term Capital Gain(LTCG) tax cuts deep, it must be rolled back or at least tweaked

This year’s Budget has unleashed(release/unwind-खोलना) a bloodbath(खून-खराबे) on the bourses(stock market-बाजार), with the Sensex crashing (collapse/ strike-धमाके के साथ गिरना) by 840 points and Rs 4.6 lakh crore of investor wealth wiped out(sweep away-सफाया). The proximate(near/closely-निकट) triggers(provoke / cause to happen-सक्रिय) were the introduction of a 10% long term capital gains (LTCG) tax on shares and equity mutual funds, together with a hike(increase/rise-वृद्धि) in projected(estimated) fiscal(financial/budgetary) deficits(deficiency/shortage-घाटा) which raised concerns(anxiety/worry-चिंता) about deteriorating (worsen/slump-बिगड़ती) government finances.

By way of comparison, last week’s Sensex crash (collapse/ fall down-गिरावट) exceeded that on May 17, 2004 – when it became clear to bourses(stock market-बाजार) that the stability of the newly formed UPA government hinged on external support from Marxist parties – by a margin of 275 points. Indeed finance secretary Hasmukh Adhia – who may have merely(only/just) reflected the thinking within government – came close to the Marxist point of view when he argued that capital gains don’t accrue(arise/emerge-वृद्धि होना) from any effort. On the contrary they require a great degree of research and acumen (intellectual / astuteness-बुद्धि-प्रखरता) in spotting winning companies, as well as assumption of a high degree of risk for which capital gains are a reward.

LTCG tax was abolished in 2004 to encourage Indian households to park more of their savings in the stock market and put it to productive use. Indians tend to invest mostly in fixed income instruments and that has not changed dramatically till date; even today India has a mere three crore equity investors. Asians love to save, and this is a key factor that drives Asian economies to clock up high rates of growth. For a while India seemed to be on this path too as its growth averaged 8.8% during 2005-11, while gross fixed capital formation was at 31.5%. That has now slipped to 26.4% – its lowest level in the last 13 years.

It’s noteworthy(remarkable/notable-ध्यान देने योग्य) that a securities transaction tax (STT) replaced the LTCG tax when the latter was phased out in 2004. Now, however, investors have to deal with both – most likely a first in any country. Low levels of private investment represent at bottom a lack of faith in India’s future, and further hurdles (obstruction/hindrance-बाधा) to savings and investment can hardly stoke “animal spirits”. To boost stock markets and the economy in a country where it’s tough to do business anyway, the government should roll back the LTCG tax. Failing that, it should at the very least tweak (change/alter-बदलाव) the tax to correspond with other assets such as property, by introducing indexation and abolishing(abatement/finish-समाप्त करना) STT.

Acumen(astuteness/smartness) :- (कुशाग्रता) the ability to make good judgments and quick decisions, typically in a particular domain.