All was fairly hunky dory at the Indian bourses till the end of January 2018. Then, the Union Budget proposed that long-term capital gains exceeding Rs 1 lakh would be taxed at the rate of 10 per cent without allowing the benefit of any indexation, and also the non-removal of the far more efficient Securities Transaction Tax.
A partial saving grace however was that all gains up to January 31, 2018 would be ‘grandfathered’ i.e., the higher of actual purchase cost or price as on January 31, 2018 would be deemed to be the acquisition cost while computing capital gains. Given the abysmally low level of equity penetration in India and the resultant lack of depth as compared to potential depth at the Indian bourses, this was a body blow that damaged one leg of the equity market.
Another blow came in the form of triple taxation of dividend income. Corporate and market participants had pinned a lot of hope on the government to reverse the anomaly of double taxation of dividends. What they received was not only a hike in rates but also another body blow that now made dividends that had already been taxed — when profits in the hands of corporate first and then as dividend distribution tax on announcement of dividend — also taxable in the hands of the recipient if it exceeded a threshold limit.
With both its legs seriously damaged, the Indian equity market had been wobbling along somehow when there was an announcement in the latest Budget that raised the highest tax slab to 42 per cent on individuals earning above Rs 5 crore. Though there is no disputing the fact that there are shady trusts with oblique holding structures, inadvertently perhaps, some bonafide Foreign Portfolio Investors (FPIs), especially pension and sovereign funds that are registered as trusts, also fell into the highest tax bracket.
This came as the last straw on their backs, as unlike Indian investors who must put their chins up for repeated taxation socks on the jaw only to grin and bear it, the FPIs have multiple alternate markets to invest in. And choose they did with their feet, leading to a flight of FPI money from Indian markets, sending key indices on a downward spiral, and hurting the INR in the process.
A vibrant equity market is the key to a vibrant economy and furthermore, the government cannot really hope to successfully complete its rather ambitious disinvestment target of `1,05,000 crore without the capital market being in fine fettle.
It is time then to consider a course correction and infuse fresh hope and enthusiasm into the capital market with a slew of measures that undoes some of the road-blocks that were needlessly put up at the earlier smooth flowing Indian bourses.
As the famous saying goes, “If it ain’t broke, don’t fix it”, and as an extension, undo the fix if that is what caused it to break. Even as I conclude this column, there is news that the enhanced surcharge on capital gains for FPIs stands withdrawn. Has the recommended course correction commenced?