Finance Minister Nirmala Sitharaman's decision to increase taxes on equity, particularly the long-term capital gains tax (LTCG), in Budget 2024 has sparked heated debate. Many in the market fear it signals an effort to curb excessive speculation. However, such concerns may be unwarranted.
Sitharaman raised the levy on stocks held for less than 12 months to 20%, the first increase since 2008, and to 12.5% from 10% for those held longer. Additionally, the securities transaction tax (STT) on equity options was increased to 0.1% and to 0.02% on futures, effective from October.
PM Narendra Modi declared that his third term would be marked by bold decisions. This could be yet another instance of PM Modi demonstrating his government’s resolve to make tough, unpopular, but necessary choices.
In an exclusive interview with AajTak, Sitharaman explained that the hike in LTCG was not aimed at intervening in the market but rather to rationalize and simplify the tax structure across different asset classes. She drew parallels to the implementation of the Goods and Services Tax (GST) in 2017, which subsumed value-added tax (VAT) on various products.
"Gold, property, and stocks have been treated differently, but why should that be the case? Every asset class should receive the same treatment. We did extensive homework to ensure the rate is revenue-neutral and equitable across all assets. The LTCG tax was raised only for equities, but we also increased the exemption on capital gains to Rs 1.25 lakh," Sitharaman said.
Following the July 23 announcement, the LTCG tax rate now aligns for listed and unlisted equity, real estate, gold, ETFs, debt mutual funds, bonds, and REITs. The FM said she does not see a stock market bubble in the making.
Finance Secretary TV Somanathan reassured the media that there are no plans to raise LTCG further in the coming years. He also noted that 88% of LTCG value comes from individuals with an annual income above Rs 15 lakh.
Many analysts support the rationalization of taxes. "Globally, most jurisdictions do not differentiate between long-term and short-term capital gains. Unlike India, most countries tax all asset classes equally. India's long-term capital gains tax at 12.5% is still quite competitive," said Kranthi Bathini, Director of Equity Strategy at WealthMills Securities.
Deepak Shenoy, Founder & CEO of Capitalmind, acknowledged some disappointment over the increased capital gains tax rates for equities but appreciated the equalization across asset classes, bringing clarity. He rated the Budget seven out of ten.
"The widening gap between STCG and LTCG rates incentivizes longer-term holdings, aligning with our view of creating sustainable wealth. This move also standardizes taxation across various asset classes, potentially simplifying investment decisions for many," said Vaibhav Porwal, Co-founder at Dezerv.
Considering the prevalent speculation in the market, the increases in STCG and the STT appear justified. Sebi's data from January 2023 revealed that nine out of ten F&O traders lose money. A recent study showed that 70% of intraday traders lost money in FY23, with younger traders under 30 years facing higher losses. Raising STCG to 20% from 15% could encourage a longer-term market perspective.
The STT hike aims to reduce excessive speculation in derivatives trading. Although derivatives are meant for hedging, they are often used for speculation. The Economic Survey highlighted the potential risks of high retail participation in derivatives trading, suggesting that significant stock corrections could lead to considerable losses for retail investors.
"A significant stock correction could result in substantial losses for retail investors in the derivatives market," the Economic Survey noted, just a day before the Union Budget 2024. Sitharaman had previously cautioned against the unchecked growth in retail F&O trading, warning of potential impacts on household finances.
Higher STT on futures and options is seen as a measure to curb market speculation. "The increase in STT on derivatives is a positive step towards reducing speculation in futures and options markets," said Sunil Damania, Chief Investment Officer at MojoPMS.
Emkay Global remarked that the STT increase is relatively minor and unlikely to significantly impact market valuations. “The concern is that people will lose savings and that will affect their consumption pattern and long-term capital formation,” said Abhishek Banerjee, founder and CEO of Lotusdew Wealth and Investment Advisors. “It’s a macro issue, not just a leverage issue.”