Higher taxation made Indian markets unappealing, govt to draft plans

Not so long ago, just two months back, the Indian capital market was considered exciting as the benchmark indices BSE Sensex and NSE Nifty touched their record levels of 40,000 and 12,000 points respectively, on the back of the return of the BJP-led government. 

Naturally, the foreign portfolio investors (FPIs) were attracted, and they infused as much as Rs 10,384.54 crore into the Indian markets. The investors were expecting favourable amendments from the government in the Union Budget 2019-20.

They were hopeful of the government addressing the issue of inconsistency in the treatment of holding period of capital assets. 

The equity holdings are considered ‘long-term’ after twelve months from the date of purchase while the debt holdings are considered long-term only at the end of thirty-six months. The real estate investments are considered long-term if the holding period exceeds twenty-four months.

Investors were expecting the government to fix this inconsistency, but, the government disappointed them. Listed companies were anticipating more equity-linked investments if the government addressed the paradox of the treatment of capital gains. Also, equity investors pay more taxes than debt investors.

The Union Budget 2018-19 saw the reintroduction of the long-term capital gains (LTCG) tax on equity investments, with no indexation benefit. Previously, the Union Budget 2004-05 replaced the then-existing LTCG tax with the Securities Transaction Tax (STT).

Investors were disappointed as the STT was not abolished with the reintroduction of the LTCG tax. 

The investors are paying dual taxes on the same capital gains, and they feel it is not fair. Also, the Union Budget 2019-20 increased the surcharge on the super-rich and FPIs registered as trusts and associations. This move led to FPIs pulling out nearly Rs 3,800 crore from the Indian capital market. 

Also Read: Post-LTCG Tax which option is better: Mutual Funds or ULIPs

FPIs have moved their investments from the equity segment to debt instruments to cut down on their tax outgo. This has hampered the growth and expansion opportunities of the small and mid-cap companies.

Large-cap companies have gained the most of this move as they are considered a relatively safer bet.   

Realising the situation, a stockbrokers’ association has met with the Finance Minister and requested the government to take some measures to improve the equity investments.

A few of the actions that are expected is the rollback of LTCG tax and making dividends entirely tax-free in the hands of investors. 

The stock markets shot up last week on the back of rumours of the government offering a one-time exempt on FPIs converting from the trust structure to the corporate structure.

As of now, the Indian stock markets don’t look attractive, and the government is left with a lot to think on and make investors confident in investing in the Indian capital market.