Why argument of LTCG is an untenable one
Deven Choksey, MD, KR Choksey opines return of LTCG in Budget 2018 would be a negative for Dalal Street
LTCG if charged would be over and above the tax already charged to investors. Currently, the investors pay STT of 3% + DDT of 20% + Dividend Tax above Rs 10 lakh of income of 10% + Short Term Tax of 15 %. If the LTCG tax is to come back, it would be one more tax—one can call it multiple taxes on income earned from same source of activity.
LTCG will be an ineffective tax as cost of compliance and collection would be atleast 30-40% for the government.
Second, it will lead to Tax Terrorism (putting extra legal pressure on the taxpayer to extract more tax), which the Modi government is vehemently against.
Third, only 2-3% of Indians invest through capital market products. After demonetisation, more funds have just started to come into the official channel from unaccounted channels. If they are taxed now or subjected to Tax Terrorism, they will once again go back to black money. They should be allowed to get used to official investment products before they are taxed directly.
Last but not the least, STT, DDT, ST gain tax, Dividend Tax to individuals are some of the cleanest taxes where cost of collection is just very low and it is high on compliance as well.
Increasing the period from 1 year to 3 years is not desired as it would stop selling of investments by investors and could lead to unavailability of large funds. For example, NMDC OFS went successful because investors could sell their LT shares and subscribe to NMDC OFS.
If you want to regulate LTCG misuse by penny stocks, let all Z group shares be taxed at 15%, irrespective of the holding period. Thus, LTCG tax is not needed when 50 lakh crore is required to be raised by the government for capex and from PSU divestment.
Instead of LTCG tax, collect Rs 50,000-1,00,000 crore from markets by selling LIC and NHAI shares under OFS route. Let India attract more global and local investors by bringing down number of taxes and rationalise the tax structure, especially when countries like USA are lowering their tax to 20%.
Disclaimer: Views expressed in this article are personal.