The finance ministry is considering extending the holding period for short-term capital gains (STCG) tax on listed securities from one year to three years, bringing equities on a par with some other asset classes in tax treatment. This is among a number of measures for the capital markets that may be announced in the Union Budget for 2018-19.
The STCG tax on stocks and mutual funds is 15 per cent at present. Listed securities held above a year do not attract any tax. The long-term capital gains (LTCG) tax on this asset class was removed in 2005, making India one of the most liberal stock market regimes. The STCG tax on other asset classes such as bonds, gold, and real estate is applied when the holding period is less than three years.
There have been demands from a section of stakeholders that the LTCG tax on equities be reimposed. Budgetmakers, however, are of the view such a move may spook institutional investors and extending the tenure of the STCG tax could be a better option.
There have also been representations to the government to do away with the securities transaction tax (STT) and to provide clarity on the goods and service tax (GST) on alternative investment funds and pass-through status for certain categories of such funds.
In pre-Budget meetings with Finance Minister Arun Jaitley and in off-record meetings with the ministry, companies, consultancy firms, and market participants have given positive feedback on extending the holding period for STCG tax.
The BSE had earlier told the ministry revenue forgone on the LTCG tax exemption on listed securities could be Rs 500 billion per annum.
“Instead of reimposing the LTCG tax, the government is considering extending the STCG tax for listed securities held till three years, up from one year currently. That will bring equities on a par with other asset classes,” said a source familiar with the developments. If the move is decided upon, Jaitley may make this announcement in the Budget.
“The government seems to be keen on doing away with exemptions and bringing down the tax rate. Extension of the STCG tax on equities to three years seems feasible,” said Rahul Garg, partner-direct tax at PwC India.
Rajesh H Gandhi, partner-direct tax, Deloitte, said, “Introducing the LTCG tax could spook the markets. People may not mind the 15 per cent tax if the holding period goes up.”
However, there were also representations on the adverse effect this could have on institutional investors, said a source aware of these deliberations. “If the holding period for STCG tax is extended, it could lead to a churn in the market between the Union Budget and April 1 (when the proposal will implemented). Investors that have an incentive to hold shares for one year due to the zero LTCG tax are likely to exit counters they do not want to hold on to for longer periods,” said U R Bhat, managing director, Dalton Capital Advisors.
According to some other stock market players, this may not be the right time to bring in these changes because the market is the only part of the economy doing rather well. They also said bringing back the LTCG tax or extending the holding period of the STCG could be done only if the STT was removed, otherwise the tax burden would be significantly higher.
As in the past, brokers’ groups have this year again requested the finance ministry to do away with the STT to improve liquidity and the depth of the stock markets. They have pointed out that the tax on traders amounts to double taxation since, unlike investors, they are assessed under the head ‘business income’ wherein gains are taxed at the rate of 30 per cent plus surcharge and cess. The STT is in addition to this 30 per cent tax. Alternative investment funds have informed the ministry about their set of demands. Industry players want clarity on the GST on management fees and expenses to be borne by foreign investors of domestic alternative investment funds. Overseas money in alternative investment funds managed by Indian asset management companies are not exempt from the GST, which effectively adds 18 per cent to the cost of management. This could discourage managers from setting up India-based funds, experts said.
Alternative investment funds want losses on investments to be available to investors for set-off. According to the Finance Act, 2015, unit-holders cannot offset losses from the fund against other profits and gains. For Category I and II alternative investment funds, any loss at a fund level is not allowed to be passed through to investors but is carried over at the fund level to be set off against income of the next year.
The other long-standing demand is for Category III alternative investment funds to be granted pass-through status, similar to what the government had provided Category I and Category II funds in 2015. The absence of pass-through status means that income from such funds will be taxed at the fund level and the tax obligation will not pass through to the unit-holders.