Tax review may not be the answer to arrest market fall

The government is unlikely to review the capital gains tax and the securities transaction tax for now even as several market participants have suggested this as one of the ways to help boost the domestic equity market amidst outflows by foreign institutional investors (FIIs).

Sources note that much of the fall in domestic equity markets have been due to global developments arising out of the tariff measures announced by US President Donald Trump. “India’s growth fundamentals remain strong, and it continues to be an attractive investment destination despite these global uncertainties,” said a person familiar with the development.

Sources also pointed out that any changes in tax rates would have been announced in the Union Budget and as such there is no proposal for such a review as of now.

FIIs have pulled out over Rs 1 lakh crore from the Indian markets in the first two months of 2025 amidst external uncertainties. The BSE Sensex has also fallen by over 12,500 points from its peak.

Several market experts as well as users on social media have suggested that one of the ways to arrest the market fall could be a possible review of the tax regime. At present, long-term capital gains tax is levied at 12.5% with an exemption of Rs 1.25 lakh on income from sale of equity while short term capital gains tax is levied at a rate of 20% following an increase in the Union Budget 2023-24 from the earlier 15%.

Securities transaction tax is also levied on the sale and purchase of stocks and other securities on listed exchanges.

Experts are also of the view that most of the market fall is due to external developments and a tax review may not be the answer.

Sandeep Jhunjhunwala, Partner at Nangia Andersen, noted that amid a steep market plunge, with the Sensex shedding over 12,500 points from its peak, investors have called upon policymakers to slash capital gains taxes and the STT in a bid to restore market confidence.

“However, it is evident that the downturn stems largely from global economic dynamics such as the US Federal Reserve's monetary tightening, geopolitical tensions and persistent FII outflows, rather than domestic taxation policies alone. While investor concerns over mounting losses are understandable, it is unlikely that policymakers will lower long-term or short-term capital gains taxes or STT, as such measures exert a negligible influence on overall market sentiment and could disrupt the government’s targeted tax revenue projections,” he pointed out.

In its recent monthly economic review by think tank NCAER, Poonam Gupta, NCAER Director General had said empirical studies show that FII flows are driven more by external factors than by domestic ones and hence are quite volatile in nature. “As in the past, the current phase of reversal of FII flows from India is a global phenomenon and is associated with reversals from many other emerging markets,” she had said.