Ahead of Union Budget 2019, expectations are high on what is in store for the stock market. With Finance Minister Nirmala Sitharaman set to present her maiden Budget in Parliament within few hours, stock markets expect her to remove long term capital gains (LTCG) tax on equity investments.
Withdrawal of capital gains tax can help bring stability in the market while making the investments in stock market and mutual funds more lucrative and beneficial for the investors. Removal of LTCG will help channelise more funds to markets either directly or through mutual funds.
FULL COVERAGE: Union Budget 2019
Anurag Garg, CEO and Founder of Nivesh.com said, " The government is not going to gain much out of it in the current financial year since the markets have remained subdued throughout the year. LTCG, in any case, does not make sense because of levy of Securities Transaction Tax (STT) on listed securities, which was the primary reason for removal of LTCG earlier."
According to CII Director General Chandrajit Banerjee, the current taxation system favours debt funding over equity investments, and encouraging greater debt in the economy. "With lower taxation on equity, investors would bring in more risk capital which in turn will drive economic growth."
In Union Budget 2018-19, former Finance Minister Arun Jaitley had reintroduced the LTCG tax, which was previously scrapped in 2004 and was replaced by the Securities Transaction Tax (STT). Arun Jaitley had levied 10% LTCG tax on profit above Rs 1 lakh earned in a financial year without the benefit of indexation. Investors in equity-oriented mutual funds were also included in the LTCG tax net. However, all gains up to 31 January, 2018 were grandfathered.
Apart from LTCG tax, equity mutual funds and stock market investors are paying STT, commodity transaction tax (CTT), dividend distribution tax (DDT), dividend tax and health and education cess among others.
This imposes a huge burden on equity investments. Market experts have called for conducive tax structures to attract equity investments and to incentivise risk capital in the economy.
Confederation of Indian Industry (CII) suggested various measures that could be taken up in the upcoming Budget for a more balanced approach to sourcing funds.
Firstly, the tax rate on all corporate taxpayers should be reduced to 25% unconditionally without any turnover criteria at the earliest. Further, this should be brought down to 18% in a phased manner with simultaneous elimination of exemptions.
Secondly, dividend distribution tax should be brought down from 20% to 10% in the Budget. This would move towards reintroducing the classical tax system, where income tax is levied separately, both on company income and on dividends received by shareholders.
Thirdly, to encourage taxpayers to invest in mutual funds and shares, the gains from sale of such shares should be made more tax-friendly by removing the taxability on sale of long-term capital assets.
Edited by Chitranjan Kumar