The government is seeking advice from tax experts on the long-term capital gains tax introduced in the Budget of FY18. One of the options considered includes removal of the long-term capital gains tax on listed equities. The other option under consideration is extending the one-year holding period to two years.
The Prime Minister Mr Narendra Modi had in a speech last year in New York, mentioned to bring taxation of equity investments in line with global standards. Most developed countries in the world do not tax long-term capital gains.
An amendment to long-term capital tax either by way of withdrawing it or extending the holding period would be in favour of attracting foreign investments. The long-term capital gains tax is also seen unfavourably by the capital markets. The government also aims at differentiating between a strategic investor and a short-term investor.
The government’s disinvestment plan requires both an investor appetite and a favourable equity market. Many strategic investors and Foreign Portfolio Investors (FPIs) are looking forward to a reconsideration of long-term capital gains tax. Sovereign funds and long-term funds generally stay invested for more than one year.
Alternately, the government can also bring parity in the holding period for all asset classes such as equities, land and building, debt funds, gold, and so on. The holding period can be set uniformly at three years for all asset classes.
If the government withdraws the long-term capital gains tax on listed equities, it is likely to revive long-term equity investments from FPIs as well as create a favourable tax regime for the disinvestment programme.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.