Stock markets await Nirmala Sitaraman's decision on LTCG

PALAK SHAH Mumbai | Updated on August 14, 2019 Published on August 14, 2019

Nirmala Sitharaman, Finance Minister   -  -

Following the blood bath on Tuesday, stock market eyes are now on Finance Minister Nirmala Sitharaman. After a meeting with top foreign fund managers and corporate honchos on August 9, she declared that positive announcements will be made soon on corporate tax.

Though the Finance Minister has been silent on rationalising cost of trading and tax in domestic stock market for all participants, it is widely anticipated that government may tweak the structure on long-term capital gains tax.

The stance taken by the Finance Ministry has fuelled bearish sentiments in the market, which is reflected in stock prices post budget.

In 2014, The IMF declared that more than a quarter of debt in India was held by loss-making companies, and 30 per cent of debt was with companies with a high debt-to-equity ratio of 5:1 or more.

Over the past five years, the situation has only worsened. Banks are lending no more and the credit tap is shut. Is there any other source of cheap and quick finance? The stock markets, where investors and traders provide the much needed risk capital, should be seen from that prism.

When there is ‘fire sale like scenario’ for physical assets, encouragement for more equity linked issuances can balance the worsening debt crises. For that, you require a throbbing secondary market in equities. But what has government done? Forget incentives to the risk takers, it has shown the knife to a hen that lays golden eggs.

Various taxes

Irrespective of loss or profit to traders or investors, stock markets gave more than ₹11,000 crore in just Securities Transaction Tax (STT) to the government in 2018. This tax could be higher if the trading volumes grow.

In addition, there is Short Capital Gains tax (STCG), Long Term Capital Gains tax (LTCG), small amounts of GST to the central government and stamp duty to the state government that equity markets contribute ‘for risking their investments’. A duplicate tax like dividend distribution has long been imposed too.

If this was not enough, FM Nirmala Sitharaman raised the effective rate of peak LTCG and STCG to 14.25 per cent and 21.37 per cent, respectively that would mainly affect a large number of Foreign Portfolio Investors (FPIs), high net worth individuals (HNIs) and institutions in India. Before budget, the peak rate was 11.96 per cent and 17.94 per cent for LTCG and STCG, respectively.

Sitharaman imposed a new 20 per cent tax on buyback of shares. Share buybacks were churning huge trading volumes, but that pool of liquidity could dry after the new tax.

Published on August 14, 2019
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