‘Some reaction from the markets was expected’

The market reaction to the long-term capital gains tax proposed in the Budget has not surprised the Finance Ministry.

Economic Affairs Secretary Subhash Chandra Garg told BusinessLine that some reaction from the markets was expected after the Budget proposed a 10 per cent long-term capital gains tax. He, however, added that the move to impose the tax was justified and has been received quite well.

“This issue was in the public domain for some time and people were expecting something to come up in the Budget. I don’t think you can decipher the exact reason why so many players act in a certain way,” he said.

“But the long-term capital gains tax was certainly going to have some impact. It wasn’t so visible when it was proposed, but now it has become visible. I think it’s a fair reaction,” he said, adding that the way the government had dealt with the entire issue was very mature and took into consideration every legitimate concern.

Pointing out that investors also have to pay tax on interest from income in investments such as debentures, fixed deposits and even on savings, Garg said, “There is nothing that justifies why capital gains should be the only asset class which doesn’t attract taxation.”

While the market remained largely stable after the Budget announcement of the LTCG tax, on Friday the BSE Sensex fell 840 points, its sharpest plunge since August 24, 2015; the NSE Nifty tanked by 250 points. “To me it appears that there was some reaction as expected and I view it as some correction. You should also take into account that our markets are currently priced at much higher ratios than many other markets, so some semblance of stability would demand that they don’t run away much ahead of earnings in other markets,” Garg said.

The market sentiment also seemed to have suffered after Fitch Ratings said that the high debt burden of the government constrains India’s rating upgrade.

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