Plan to raise capital gains tax period spooks many

Experts say move to raise period from one to three years could scare markets

The already-nervous Street has a new reason to lose sleep. The plan proposed by the government to increase the time frame of long-term capital gains tax from one year to three years has made the stock market investors nervous in the run-up to the Union Budget.

Capital gains are the profits that an investor realises when he sells a stock. Long-term capital gains tax is a levy on those gains.


Currently, investors don't have to pay any capital gains tax on shares sold on an exchange after one year of holding. The move to increase the holding period to three years would force investors to hold on to their stocks, hurt sentiment, and lead to a crash in the market, say experts. Benchmark indices are already down 10 per cent this year following a rout in the global markets.

Sudip Bandyopadhyay, managing director and chief executive, Destimoney Securities, believes such a move would be "disastrous".
 

 

TAXING TIMES

• Long-term capital gains tax period on stocks currently is one year
• Government is considering making it three years
• Experts say market would react adversely to such a move
• Market players say Street would continue to trade nervously in the run-up to the Budget
• In 2014, the govt raised the long-term capital gains tax period from one to 3 yrs on non-equity funds

"There is already nervousness in the market and the talks to increase capital gains tax time frame is putting a lot of pressure on the market players. The market would tank if this becomes a reality," said Bandyopadhyay.

Deven Choksey, managing director, KR Choksey Investment Managers, said, "Tinkering with capital gains tax period at this time would not be a good idea. As markets are so volatile, a time frame of more than a year would defeat the purpose of the tax benefit."

Interestingly, the proposal to increase the time limit to three years is part of the budget recommendations made by the BSE, to avoid the misuse of the exchange platform for avoiding taxes. In the recent past, the market regulator and the BSE have taken action against several entities for manipulating shares of listed companies to make illicit gains worth crores.

"The method involves, making a preferential allotment to known entities. These shares, in line with the regulations, are locked in for one year if allotted to non-promoters and for three years if allotted to promoters. Often the allotment may also be made to 'benami' entities that have close links to promoters but are not classified as such. Then the prices are moved upwards secretly (off the surveillance radar of exchanges) on low volumes till the lock-in period expires. Upon the securities being free of lock-in, the entities sell off the same through the stock exchanges by paying the small amount of securities transaction tax and get the full benefit of exemption from long-term capital gains tax," BSE has written to the government.

Both the BSE and the National Stock Exchange (NSE) have also sought a reduction in the securities transaction tax from the government.

Tax experts are of the view that the government may not tinker with the long-term capital gains tax period in the budget on February 29.

"Given the market situation, I will be surprised if the government changes the time frame for long-term capital gains tax. If they do change it, one has to see if it will be only for stocks or also for stock mutual funds. Also, the impact on securities transaction tax, from which the government mobilises Rs 6,000-Rs 7,000 crore every year, needs to be considered," said Ketan Dalal, senior tax partner, PwC India.

Experts are of the view that if the long-term capital gains tax period is increased, the government may have to reduce the securities transaction tax.

In its first budget, the Bharatiya Janata Party government had increased the long-term capital gains tax period from one year to three years on non-stock mutual funds.