The government on Thursday reintroduced Long Term Capital Gains (LTCG) tax in Union Budget 2018-19.
Long term capital gains exceeding Rs 1 lakh on sale of equity shares/units of Equity oriented Fund are proposed to be taxed at 10% without allowing any indexation benefit, said Finance Minister Arun Jaitley in Lok Sabha during his Budget speech.
The imposition of this tax will bring the government marginal revenue gain of about Rs 20,000 crore in the first year.
Experts do not see a huge impact of LTCG tax on the market.
Dr V K Vijayakumar, Chief Investment Strategist at Geojit said, "Fiscal slippage to 3.5 % from the target of 3.2 % and the 10 % tax on LTCG are negatives; but the grandfathering of LTCG on purchases till January 31, 2018 is welcome. The great relief is that the FM has done no major harm. From the market perspective a bit disappointing, but not worrisome."
The Sensex fell over 400 points after finance minister announced the tax on equity transactions but later cut losses to trade over 233 points higher at 36,198.
Mr Deepak Jasani, head, retail research said reintroduction of LTCG on listed equities may not impact FII flows to a large extent as
1. Most countries except a few levy tax on LTCG.
2. Foreign institutional investors (FIIs) are concerned with net return earned by them i.e. post tax return and if they feel that Indian markets or equities can give them a return (post LTCG) which is higher than their threshold or competing countries, they will still invest in India.
3. FIIs are watchful about currency moves i.e. USDINR moves. In case they feel that the rupee is likely to be stable or appreciate, then they will still remain bullish on India given the fact that India will still be the fastest growing economy in the near future.
On the effect of LTCG tax on divestment programme of the government Jasani said, "Apart from the temporary negative effect on the equity markets, the govt divestment program can progress as planned subject to India's macros improving and there being no global shock.