NEW DELHI: Exemption to equities from longterm capital gains (LTCG) tax was leading to higher asset valuations and was posing a potential risk to small investors, Finance Secretary Hasmukh Adhia said today.
Explaining the rationale behind reintroduction of longterm capital gains tax after 14 years, Adhia said while long term investments in all other assets generating returns are taxed, the same in stocks was exempt which was creating distortions as there was a demand-supply mismatch.
"So what happens is too much money is chasing the share and mutual fund. So because of extra inflow the asset valuation keep on increasing and sometimes the asset valuation may not be reflecting the fundamental strength of the company you are investing."
"It is a potential risk particularly to small investors. And so it wasn't a good idea to keep one class completely out of taxation," Adhia said at post-Budget meet held by PHD Chamber here.
He said the decline in the key stock market indices is primarily due to global market meltdown over last few days and not due to the imposition of long-term capital gains.
"What happened on February 2 and February 5 was mainly because of global shake up that was happening. Of course there is a ripple effect of whatever happens in the world on Indian stock market. Most of it is because of the global market otherwise the Sensex and the Nifty would have come down on the first and the second day (of Budget), Adhia said.
He said India still remains an attractive investment options as FIIs were net buyers in Indian equities yesterday.
Adhia said that the ministry appreciates the role of private capital investment in equity market as also the role of financial intermediaries, who are keeping stock market vibrant.
"There is no intention of undermining their role in the process," he said.
"When all other factors of production such as wage employment, where after hard labour one gets salary, are also subject to full taxation, it is not a good idea to keep anyone class of investment completely exempt from taxation".
Adhia said an investor has option to invest in fixed deposits, startup and unlisted equity or immovable property or in equity linked mutual fund or directly into equity market.
While all long-term capital gains are taxed, those in equity markets were exempt from the levy since 2004.
"If you exempt any one out of 4-5 investment class out of taxation then it is very much possible that most people would like to park their funds in such an asset which has no tax incidence and if the supply of money is too much for one asset class naturally the valuation should increase of that particular asset class," he said.
Currently, India imposes a 15 per cent tax on short term capital gains made of sale of shares within a year of purchase.
The Budget 2018-19 has reintroduced the provision of taxing long term capital gains after a gap of 14 years.
From April 1, 2018, a 10 per cent tax on LTCG of over Rs 1 lakh made on sale of shares. However, all gains made up to January 31, 2018, have been grandfathered -- meaning no tax will be imposed till that date.