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Prime Minister Narendra Modi on Saturday hinted at increasing taxes on capital markets, adding that his government would not hesitate from taking tough decisions such as demonetisation.
“Those who profit from financial markets must make a fair contribution to nation-building through taxes. For various reasons, the contribution of tax from those who make money on the markets has been low,” said Modi during his speech at an event organised by capital market regulator Securities and Exchange Board of India (Sebi). The PM, along with Finance Minister Arun Jaitely, was present at the event to inaugurate a new campus of National Institute of Securities Markets (NISM), an educational arm of Sebi, on the outskirts of Mumbai.
Currently, long-term capital gains (LTCG) on the sale of listed securities are exempt from taxes. LTCG are profit on sale of shares on a stock exchange platform after a holding period of one year or more. Meanwhile, short-term capital gains (STCG), profits on sale of shares held for less than 12 months, are taxed at a flat rate of 15 per cent. Besides these, all stock market transactions also attract securities transaction tax (STT) in a range between 0.017 per cent and 0.125 per cent.
“To some extent, the low contribution of taxes may also be because of the structure of our tax laws. Low or zero tax rate is given to certain types of financial income. I call upon you to think about the contribution of market participants to the exchequer. We should consider methods for increasing it in a fair, efficient and transparent way,” said the PM at the event.
It was attended by several leaders of India Inc, including R C Bhargava, chairman, Maruti Suzuki; Chanda Kochhar, chief executive officer, ICICI Bank; and Ajay Piramal of the Piramal group.
The comments triggered a discussion among the attendees, particularly those operating in investment banking, broking and the mutual fund space.
“The government might be considering changes to the LTCG structure. Either they would increase the time period to avail LTCG or bring such gains under the tax net as well. Both will be negative for the market,” said a senior official with an investment bank, who attended the event but asked not be named as the issue was still not formally taken up for discussion by the Centre.
The Modi government had, in its first Budget in 2014, increased the holding period for debt mutual funds from one year to three years for availing the LTCG benefit. There was speculation that the government would tinker with the LTCG holding period for equity investments as well in this year’s budget. However, no such decision was announced.
The PM latest comments could make the markets anxious again in the run up to the Budget 2017-18.
“We will not take decisions for short-term political point scoring. We will not shy away from taking difficult decisions, if those decisions are in the interest of the country. Demonetisation is an example. It has short-term pain but will bring long-term gain,” Modi said in his speech.
The PM said the financial markets must provide benefits to the largest section of the society including the farmers.
“The true measure of success is the impact in villages, not the impact in Dalal Street or Lutyens’ Delhi. By that yardstick, we have a long way to go. Our stock markets need to raise capital in innovative ways for projects in agriculture. Our commodity markets must become useful to our farmers, not just avenues for speculation,” he said.
“Earlier, there was a feeling that some investors were getting an unfair deal by using certain tax treaties. As you know, those treaties have been amended by this government. Now it is time to re-think and come up with a good design which is simple and transparent, but also fair and progressive,” the PM said.
