On the eve of the budget, one of the most sought after questions in the minds of Investors is Will He or Will He Not?
“Yes”, you guessed it right we are talking about the Introduction of Long term Capital gain Tax on investments in equities and equity related Instruments(MFs), which have disappeared since the year 2004. In the last 13 years, a generation of investors have grown believing that tax free equity income is an entitlement which equity investors enjoy at the expense of other asset classes. Taking cues from the economic policies of this government for the last 4 years I have come to this conclusion that introduction of LTCG is inevitable in the Budget of 2018. The government has used all the measures (Demonetization, GST, Stringent Measure to curb Black Money, Dissuading Indians from investing in Real Estate) and this will probably be the next measure to be added to their list.
Look at India from the Prism of Value Shift rather than Value Creation; this will explain the conundrum of equity taxation far more clearly
Broadly, India has been a story of Value shift rather than Value Creation. The value shifted from MTNL+BSNL to the private players, Air India to private airlines, domestic refining and exploration to private exploration, Public sector banks to Private sector banks and many more such cases. Sadly, in many other cases like manufacturing of cellular phones, solar panels and now batteries for Electric Vehicles, we are just importers rather than manufacturers; to describe this in one sentence- this is nothing but the shift of value to from our nation to the other nations. It has been a decade since an industry of repute has grown in India; Information Technology and Pharmaceuticals, both with the vintage of Year 2000 are now hitting maturity. The story of selling garments or attaining cost arbitrage by devaluing currency does not hold true for long in the economic history of a nation. The limited point in a rapidly changing highly competitive globalized world is that we are not able to make our mark. We have been consumers of technology not producers of technology and thereby what you see is jobless growth in India. With this backdrop,the redistribution of wealth from the rich to the poor, ‘have’ to ‘have not’ is the only option left with any form of political (right wing/left wing/socialist/communist etc) formation.
Why did we miss this in the first four years of this government? The corridors of New Delhi were busy fixing tax treaties with the tax havens of the world(1), walking their way through huge divestment programs(highest in the recent history despite the occasional murmur and musing of Prime Minister on taxing equity), meanwhile the gloated non tax paying equity investors have missed the transition of economic policies of the country from shades of Chidambaram to Modi. The introduction of surcharge on salary income of Rs 1 cr p.a and triple taxation on Dividend income above Rs 10 L should have given us enough cues that a political system cannot work this way by taxing interest on Fixed Deposit but by allowing gains on Equities and equity related instruments to go tax free. The economic policy to re-distribute wealth is coming (2). Welcome to the Value shift.
How we see this coming ; Cue from Germany
As quoted by our honorable prime minister Mr. Narendra Modi at the India France business summit in Jan 2016 “Retrospective tax is a matter of past. That chapter will not be opened again. We are ensuring that neither this government nor the future governments can open this chapter.” I strongly feel that he meant this for all kind of inward and outward investments. We should take a leaf from Germany where Long term capital gain tax on equity got introduced with effect from 1st Jan 2009, prospectively. A brief dislocation was available on creation of short term taxation after the said date but big picture was not lost. I would be disappointed if policy makers do not tax short term trading, demonstrated by high portfolio turnover ratios of Mutual Funds, under the guise of their pass through status.
To conclude the discussion, long term capital gain tax on equity and equity instruments is inevitable and is begging implementation by other asset classes, which are reeling under pressure under the purview of high taxes.
31st Jan 2018
Earlier readings on this subject on Blogs/Linkedin Posts (Tax Balance Sheets of Indians, Gold Loan Schemes, Musing on Real Estate Sector)
(1) In the past 10 years(i.e 10 years before 2016) India saw $239 billion of FDI inflow. Out of this $81.8 billion or 34% have come from Mauritius
In the same period Singapore has accounted for $42 billion or 22% of FDI flows into India. So put together Singapore, Mauritius account for more than half of the FDI into India.
India had signed a DTAA(double taxation avoidance agreement) with 88 countries to avoid double taxation, but people set up shell companies in Singapore and Mauritius to take advantage of this situation because short term capital gain is exempt in countries like Singapore and Mauritius. So in 2016 the DTAA were amended which stated that any investment made on or after 1st April 2017 would be charged 7.5% short term capital gain tax, this would be upto 31st March 2019 and any investment made on or after 1st April 2019 would be charged the standard rate of 15% capital gain tax.
(2) Long term Capital gain in India up-to 2004-05 was 20% with indexation benefit and 10% without indexation benefit. Surcharge for Fiscal year 17-18 or Assessment year 18-19 is 10% of the income tax payable where total income exceeds 50 lac up-to Rs.1 cr and 15% of the income tax payable when total income exceeds Rs.1 cr.