For more equity: on long-term capital gains tax

The 10% long-term capital gains tax should be revised by allowing indexation(listing-सूचीकरण)

The Centre’s decision(verdict/judgement-फ़ैसला) to bring back the long-term capital gains tax (LTCG) on equities, which was scrapped(finish/cessation-समाप्त) in 2004-05, seems to be a hasty(hurry/impetuous-जल्दबाजी) move to plug the widening(extend/enlarge-चौड़ा) fiscal (financial / budgetary-वित्तीय) deficit(shortage/deficiency-घाटा) ahead of an election year. With investors in equities enjoying terrific(enormous/colossal-भारी) returns over the last few years, it is not a surprise(astonishing/shock-आश्चर्य) that they have become targets for the government to secure additional revenue. The decision to announce (declare/ promulgate-घोषणा) the imposition(levying/charging-लगाना) of 10% tax on gains of over ₹1 lakh made on any form of investment in listed equities(firm/companies) and mutual funds with a holding period of over one year will hit the average middle class investor. 

Not surprisingly(astonishing/amazing-आश्चर्यजनक), the sharp fall in both the Nifty and the Sensex after Budget day has been linked to the new tax, along with the government’s abandonment(relinquish/renounce-छोड़ देना) of fiscal goals(aim/objective-लक्ष्य). But given that the sell-off was part of a wider correction in global stock indices, it may be hard to draw a definite conclusion on the exact impact (effect / efficacy-प्रभाव) of the LTCG. The Centre has justified the new tax arguing that it helps avoid the erosion of its tax base and levels the playing field between financial assets (property/wealth-संपत्ति) and investment in manufacturing.

One legitimate(legal/licit-वैध) concern(matter/case-मामला) is whether raising the tax burden on equities, rather than lowering the tax and other barriers(hindrance/hurdle-अवरोध) to investing in alternative assets, is the right way to address the distortionary(pervert/deform-विकृत) effect of taxes. Further, the smaller differential between short and long-term capital gains tax itself will discourage the long-term holding of stocks in favour of short-term trading activity. While this might serve to improve liquidity in Indian markets and add to the government’s revenue, it is also likely to discourage to some extent(limit/range) the growing culture of investing in equities for the long run. Besides, the securities transaction tax (STT), which was introduced in lieu(instead of/swap-बदला) of the LTCG in 2004 and penalises(punish/chastise-सज़ा) the buying of stocks for purposes other than just intra-day trading, has been left untouched by the government. The double whammy*(a blow-मार झेल) of the STT and LTCG will further privilege(benefit/prerogative-सुविधा) short-term trading in stocks over long-term investment. 

Being the only country in the world to impose(inflict/foist-थोपना) both the STT and LTCG, India is also likely to become a little less attractive to foreign investors when compared to its peers(colleague/fellow-साथियों). A complete rollback (recant/withdraw-वापस लेना) of the new tax is too much to expect — Finance Secretary Hasmukh Adhia has justified the higher tax levy saying that the capital gains accrue(emerge/arise from-उत्पन्न) from zero effort. Despite the constraints(limits/restriction-बाधा), the government would do well to at least soften the negative impact of the new tax by allowing indexation (allowing a set-off based on inflation rate) of capital gains and removing the STT on equity investments. Tough love for the well-off is not a bad strategy(plan/policy-रणनीति) for a pre-election Budget, but it is important to be careful about maintaining India’s credibility (reliability / integrity-विश्वसनीयता) in the global money markets in the process.

*Whammy(a blow-मार झेल) :- an event with a powerful and unpleasant effect