Market experts are confident that there will be no adverse impact on the equity market, following the revised draft on Direct Tax Code (DTC) that proposed to continue with the securities transaction tax and long-term capital gains tax. They feel the new proposals do not change the investment environment in India and investors need not worry about the long-term repercussions.
According to the new discussion paper, the securities transaction tax (STT) is proposed to be calibrated based on the revised taxation regime for capital gains and flow of funds to the capital market. This is in sharp contrast to the earlier draft that spoke about the withdrawal of the STT, along with the return of long-term capital gains tax.
“I would say the revised paper is not very negative for the market,” says Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services. “While STT has been retained in the new discussion paper, I don’t think there would be much change in the rates as earlier it was in lieu of long-term capital gains tax, which will return once the new code is implemented.”
The securities transaction tax is levied on all transactions done on the stock exchanges. It is applicable on purchase or sale of equity shares, derivatives, equity oriented funds and equity oriented mutual funds. Currently, STT on purchase or sell of an equity share is 0.075 per cent.
“There would not be much of an impact in the market,” says Dinesh Thakkar, chairman and managing director, Angel Broking. “The government knows that India needs capital and so my guess is that the rates will not be tweaked in a big way. There is a feeling that initially the tax rates would be kept low and if there are concerns related to high deficit only then those will be raised. Currently, there is nothing to worry about.”
Meanwhile, the proposals of the tax code eliminate any kind of distinction between short-term investment asset and long-term asset. Currently, investors have to pay no tax if the assets are sold after holding them for more than 12 months. Short-term capital gains are taxed at 15 per cent on the quantum of appreciation.
A section of market players feels that the introduction of long-term capital gains would make investors more selective while choosing the right kind of fund to invest their money. Also, with no real incentive to hold shares for a longer period of time, there is a likelihood that churning of portfolio might increase, they said.
“Government is leaving no option, but taxing all products whether it is a ULIP, mutual fund or a post office scheme,” said the chief investment officer of a domestic mutual fund. “With long-term capital gains tax being mulled, investors will go after the best product which can yield better returns.”
“An individual should be given incentives to invest more into equity and that too for a longer period of time. With this new taxation, the incentive will be withdrawn. And since the taxes will be taken up from the current zero per cent, it will lead to more churning in the current equity and mutual fund portfolio,” said the equity head of another domestic fund house.
