Finance Minister, Arun Jaitley, made the worst dream of “imposition of long term capital gains tax on equities” of investors come true today.

He has introduced the long term capital gains tax on sale of listed equity shares at 10 per cent without indexation benefit for an amount exceeding capital gains of Rs 1 lakh. He has also levied 10 per cent tax on the income distributed by equity oriented mutual funds.  

However, shares purchased up to 31 January 2018 will not be subject to this requirement. Further, capital gains in excess of highest price in the last 6 months will only be taxed. In short, all gains up to 31st January 2018 will be grandfathered.

The total amount of exempted capital gains from listed shares and units is around Rs 3.67 lakh crore as per returns filed for assessment year 2017-18.

Major part of this gain has accrued to corporates and limited liability partnerships. This has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets, Jaitley pointed out as the reason for imposing LTCG tax.

Investors in a listed company now suffer taxation on multiple fronts – corporate tax paid by their company, then dividend distribution tax paid by their company, then direct incidence of tax in the form of STT when they buy the stock, tax on large cumulative dividends received and now even LTCG tax on exit from their investments (without indexation).

Amar Ambani - Partner & Head of Research, IIFL Wealth, suggested that Finance Minister should have at least done away with securities transaction tax (STT) on listed shares and withdrawn the dividend distribution tax.

No tinkering on Securities Transaction Tax, makes India as probably the only country in the world to have both taxes at the same time according to  B. Gopkumar, Executive Director & CEO , Reliance Securities.

Overall, most market players, who were earlier dreading the negative impact of LTCG on markets, have now welcomed the move.

Though imposition of tax is certainly a negative for sentiments, returns and future flows, grandfathering provisions will compensate for the same or minimise the pain, consensus said.

“The FM has taken certain measures to ensure that existing investments are not affected and wide fluctuations in the stock market are avoided," said Maulik Doshi, Partner, Transfer Pricing and Transaction Advisory Services, SKP Business Consulting LLP.

“The proposal to levy long term capital gains tax on equities at te rate of 10 per cent is a negative surprise but not the limited rate with grandfathering of purchases up to Jan 31, 2018 would mitigate the adverse impact to a large extent,”  Gaurav Dua, Head of Research, Sharekhan,  added.

Amar Ambani does not see prolonged impact of the LTCG tax on markets. As a result, Nifty 50, which slipped as low as 1.4 per cent, ended marginally down by 10.8 points at 11,016.90.

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