Markets seen facing double whammy in new fiscal year
DUAL TAXATION Long term capital gains tax, securities transaction tax to be applicable starting April 1 MUMBAI/CHENNAI:
For fourteen long years, stock market investors have taken all their long term capital gains to the bank. That ends from April 1. While the markets have taken it in their stride, the government will be anxious to see if its intention to collect revenues succeeds. Otherwise, it will prove to be a much criticised measure that raised very little revenue.
Starting April 1, a long term capital gains (LTCG) tax on sale of equities will be applicable on gains exceeding ₹1 lakh in a financial year. The tax rate is 10%. While domestic brokerages say that they have witnessed some profit booking and do not foresee any further impact, there are questions about foreign flows.
For foreign investors, LTCG and Securities Transaction Tax (STT) together have increased the complexity and the cost of investing in India when compared to other jurisdictions, said experts.
“Strictly speaking, there will be a sentiment impact due to the dual taxation. Domestic investors do not have a choice but an FII can choose to invest in other lower tax jurisdictions. Even global indices may lower India weightage due to tax complexity,” said Atul Kumar, head-equity funds, at Quantum Asset Management Co Ltd.
According to Asia Securities Industry & Financial Markets Association (ASIFMA), the LTCG levy will increase the complexity of the tax system.
“Complexity increases with respect to determining the period of holding, rate of tax for different investments (including the tax rates available under a tax treaty), etc. India may consider providing an exemption to FPIs from levy of short-term and long-term capital gains tax,” said ASIFMA in a report published on February 22.
“We are not saying do not tax but instead of unpredictable and complex LTCG increase the STT. This will help in continued revenue and a competitive advantage,” said Mark Austen, chief executive officer at ASIFMA.
FIIs are net buyers so far in this year but invested a net of mere $3.3 billion, which was less than half of such inflows in the year before. In February, FII selling was at 15-month high due to LTCG impact and also because new Federal Reserve Chairman Jerome Powell’s hawkish comments and indications that pace of interest rate hikes in the US will be more than anticipated.
Globally, India is one of the very few countries that imposes capital gains tax on foreign investors in listed securities, and even rarer amongst countries that impose both capital gains tax and STT.
Another interesting feature is that while equity mutual funds will be levied LTCG, the unit linked insurance plans (ULIPs) and national pension scheme (NPS) will remain unaffected, putting equity mutual funds at a tax disadvantage.
To be sure, others such as Priya Sunder, director and co-founder, PeakAlpha Investment Services Pvt. Ltd, say that LTCG does not impact investment returns in a big way especially if the investment horizon is long term.
Ajay Bodke, chief executive and chief portfolio manager at brokerage Prabhudas Lilladher Pvt. Ltd says he does not foresee any material impact on markets due to grandfathering.
“It is likely to be business as usual as opens for trade on 2 April. Grandfathering of the LTCG tax was a master stroke. There would have been concerns around LTCG had there been no grandfathering clause attached to the taxation of LTCG. So, now only incremental gains from January 31 is going to be taxed. Had there been no grandfathering, investors would have been caught unaware and essentially, markets abhor uncertainties. Also, the exceptions of ₹1 lakh from LTCG will ally fears of retail investors,” said Bodke.