Weeks ahead of the 2017-18 Budget, the government has made market participants nervous by talking about tax on sale of shares.
On Saturday, Prime Minister Narendra Modi said, "Those who profit from financial markets must make a fair contribution to nation-building through taxes."
The statement led to buzz that the government plans to announce tax on long-term capital gains (LTCG) on sale of shares. FM Arun Jaitley on Sunday clarified the government would not impose tax on long-term capital gains.
Clearly, the government wants to raise tax volumes it garners from the market and spend them for development of the economy. Going by the FM's statement, the government would not levy a LTCG tax on sale of shares but it could take other routes to raise taxes from the market.
We look at five ways the government is likely to raise taxes on your market transactions.
Raising securities transactions tax (STT): STT is levied on every purchase or sale of securities listed on Indian stock exchanges. Currently, the government levies 0.017 percent to 0.0125 percent (depending on the nature of trade) on every stock market transaction. A rise in STT will hit all market participants, irrespective of the volume of trade carried out by them. STT was introduced by finance minister P Chidambaram in 2004.
Raising short-term capital gains tax rate: Short-term capital gains (STCG) in case of listed securities, units of UTI and Mutual Funds specified u/s 10 (23D) or zero coupon bond arise when you sell shares within one year of buying them. The tax rate is currently at 15 percent. According to media reports, tax on STCG on stock market transactions could be raised to 20 per cent in Union Budget 2017-18.
Extending short term capital gains tax tenure: Currently, any sale/ purchase of securities beyond the time limit of one year do not come under tax net. The government may announce the extension of the time limit to two or three years, thus raising taxes from market participants who invest in shares for 2-3 years and were earlier exempt from any tax on such transactions.
Levying tax on large transactions: Apart from individuals, institutional investors and corporates are also involved in large market transactions. These trades may attract a small amount of tax, which would contribute to coffers of the government.
Raising tax on dividend income: Your dividend income arising from stock market investment could fall soon if the government levies additional cess on the same. Individuals earning dividend income in excess of Rs 10 lakh annually are likely to be affected with the government's step. Currently, they pay an additional 10 percent tax to the government, which was proposed in Union Budget 2016-17.