Mumbai/Chennai: For 14 long years, stock market investors have taken all their long-term capital gains (LTCG) to the bank. That ends from 1 April 2018.
While the markets have taken it in their stride, the government will be anxious to see if the LTCG tax indeed brings in revenues; else, it could end up as a measure that attracts more criticism than revenue.
Starting 1 April, LTCG tax on the sale of equities will be applicable on gains exceeding Rs1 lakh in a financial year. The tax rate is 10%. While domestic brokerages say they have witnessed some profit booking and do not foresee any further impact, there are questions about foreign flows.
For foreign investors, LTCG tax 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 (foreign institutional investor) 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.
The government has budgeted a revenue of Rs20,000 crore from LTCG tax in the first year and expects it to increase in subsequent years.
According to the Asia Securities Industry and Financial Markets Association (ASIFMA), the LTCG tax 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,” ASIFMA said in a report published on 22 February.
“We are not saying do not tax; but, instead of unpredictable and complex LTCG, increase 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 this year but have invested a net of a mere $3.3 billion, which was less than half of such inflows in the year before.
In February, FII selling was at a 15-month high due to the LTCG tax impact and also because new US Federal Reserve Chairman Jerome Powell’s hawkish comments sparked fears that the 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 among countries that impose both capital gains tax and STT.
Another interesting feature is that while equity mutual funds (MFs) will be levied LTCG tax, the unit-linked insurance plans (ULIPs) and national pension scheme (NPS) will remain unaffected, putting equity MFs at a tax disadvantage.
To be sure, others such as Priya Sunder, director and co-founder, PeakAlpha Investment Services Pvt. Ltd, say LTCG tax 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. Grandfathering means capital gains till 31 January will not be taxed.
“It is likely to be business as usual as market opens for trade on 2 April. Grandfathering of the LTCG tax was a masterstroke. 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 31 January are going to be taxed. Had there been no grandfathering, investors would have been caught unawares and, essentially, markets abhor uncertainties. Also, the exceptions of Rs1 lakh from LTCG will allay fears of retail investors,” said Bodke.
According to Sunder of PeakAlpha, this is a good time to clean up the portfolio and remove laggards.
“One can still exit (even in the new financial year) the non-performing schemes with minimum impact of LTCG due to grandfathering. The notional date of purchase is 31 January 2018; so, any capital gain before that period is protected. Also, the first Rs1 lakh is exempt from LTCG. This is also a very good time to move away from the dividend payout option to the growth option if your horizon is long-term and you don’t need pay-outs. This is because of the dividend distribution tax of 10%, which will be deducted by the mutual fund houses before paying you the dividend. At least in the growth option, capital gains up to Rs1 lakh are exempt from LTCG tax,” said Sunder.