Will he, won't he? Based on the PMs pronouncements about the economic contribution of markets (stock markets, commodity markets, et al.), their utility to the real economy and the low contribution of capital market participants to the national exchequer, there is a worry that long term capital gains on equities might be taxed. I have only one wishlist from this budget - the powers that be must desist from taking this retrograde step, especially based on a complete misunderstanding of why equity gains should be taxed or otherwise.
Stock markets value profits of listed companies. As we know profits of companies flow after paying for all inputs, and inflation on those inputs, which may come from unorganised, unlisted, MSME units etc., after paying all indirect taxes and paying for workers emoluments and benefits. All sources of inputs is taxed at multiple levels. Indirect taxes, of course, go to governments and workers pay tax on their earnings too. After accounting for all this, companies make a profit and then they pay tax on those profits. From these profits companies declare dividends - there is a distribution tax on those dividends and for those who earn more than ?10 lakh as dividend, there is a further tax over and above - which as you will gather isn't "net" until you pay another 10 per cent in case you earned more than ?10 lakh as dividend. This impacts capital formation and incentive to be an entrepreneur or be a partner of an entrepreneur.
Now, come to people who are buying and selling equities - the ones who are not long term investors and to whom the above logic doesn't apply. Well, they are already paying short term capital gains tax at 15 per cent plus surcharge and they are paying significant amount as STT or CTT as the case may be. They anyway don't get covered by or care for long term capital gain - they don't have any usually because they become long term holders only when they are on the losing side of a trade!
So, imposing taxes on capital gains from equity investing is taxation at multiple levels for investors; on tax paid profit generation which is what drives the markets. More importantly it is a serious disincentive to long term investing. If one applies tax on long term gains as is being applied on short term gains, we are basically being told that whether you stay long term or short term you will be taxed on gains. In the best case it will push good investors into a trading mindset or, at worst, it will drive people away from equity investing.
Unlike a lot of people from the industry, I do not want any tinkering on Sec 80C or retirement plans, et al. If any of that happens that's good but I think the dramatic shift in the interest rate paradigm post demonetisation and the bad vibes for real estate and gold are good enough to drive investors towards equities. Talking of comparisons in the current paradigm, it's worth noting there's no "black" or "parallel" economy which finds its way into markets because money comes in from and goes back to official banking channels. Our industry has been digital and cashless for as long as I remember. I wish equity investing is not disincentivised by multiple levels of taxation and lack of respect for entrepreneurial spirit which is what this country needs. Our problem is not whether FPIs are buying or selling - our problem is that Indians just don't own India's growth!
Aashish Somaiyaa is the MD & CEO, Motilal Oswal Asset Management Company Ltd