Tax on long-term capital gains (LTCG), the impost that is the most fiercely opposed by India’s stock market participants, may finally be taken up by the government in Budget 2018. The Finance Ministry is looking to do away with the distinction between tax on long- and short-term capital gains or raise the holding period for long-term tax exemption to three years from one, two sources close to budget preparations told BusinessLine .

Short-term capital gains from equity holding for less than a year are taxed at 15 per cent. Gains from shares sold after a year, known as LTCG, have been exempt from tax since 2005. The LTCG exemption was intended to promote equity investments, but the Direct Tax Code (DTC) framework, re-drafted in 2009, proposed an elimination of this distinction.

Political compulsion

In 2012, the new DTC was implemented, but to avoid hurting stock market sentiments, the UPA government decided against tweaking the capital gains tax structure. So far, the NDA government too has avoided the proposal. But since 2018 will mark the last full Budget before the 2019 general elections, the government wants to leverage the stock market buoyancy to fine-tune the capital gains tax structure, the sources said.

“Equity markets are at a historic high, and there is no fear of capital outflows. The government is looking to improve the tax pool from the capital markets, given that there are not many other areas to do so,” said the source.

“LTCG may not only result in a windfall for the exchequer, it will also curb tax avoidance using the exchange platform. It can bring parity between excessive speculation and investment, the government believes.”

The government was losing an estimated ₹49,000 crore in taxes from LTCG exemption, the BSE said recently. Foreign portfolio investors pay no tax even on short-term gains under the terms of the tax avoidance treaty that India has with Singapore and Mauritius. So, about 60 per cent of equity trades have zero tax.

Stock brokers argue that the securities transaction tax (STT) is a replacement for LTCG, but tax authorities disagree. STT was introduced to track equity transactions as there was gross under-reporting, officials say. The STT generates only ₹7,000-8,000 crore annually even on equity market monthly turnovers worth lakhs of crores.

Recently, the tax tribunal overturned all department orders that declared LTCG claims as bogus. The tribunal said mere suspicion of manipulation was no reason to disallow LTCG exemption when the law allowed it. That defeated the Department’s move to boost tax collection and forced it to recommend a change in the tax regime.