NEW DELHI: Revenue Secretary Tarun Bajaj’s recent statement that low tax on capital gains from equities is not justifiable has not gone down well with large equity investors as well as fund managers. They say capital gains tax on equities is lower than other asset classes because every sale and purchase transaction in equities attracts Securities Transaction Tax (STT), which earns the government more table taxes than capital gains.
Vijay Mantri, co-founder and chief investment strategist in wealth management firm JRL Money, says that the government had opted STT over long-term capital gains in the first place because it is a more stable source of revenue for the government than long-term capital gains, which depends on the equity market performance.
Short-term capital gains from equities are taxed at 15% while long-term capital gains over Rs 1 lakh are taxed at 10%. The government levies a 0.1% STT on each equity sale or purchase transactions on exchanges. Short-term capital gains on all other assets are taxed as per an individual’s income tax slab, while long-term capital gains are taxed at 20% with indexation benefit.
The government earned Rs 17,000 crore as STT in 2020-21, and expects to collect Rs 20,000 crore in STTT in 2021-22. The government has collected Rs 6,000-8,000 crore as long-term capital gains in 2020-21, and the revenue department sources say they expect Rs 60,000-80,000 crore from long-term capital gain in the current financial year.
However, the jump in collection can be attributed to sharp upward movement in equity markets in 2021-22, and experts believe that such flow of capital gains taxes is not possible every year. Industry players also feel higher taxes on equity capital gains may dissuade investors from investing in equity markets.
"This is a tough balancing act between attracting investment and generating revenues for the state. In the long term, (higher) taxes can shape the flow of capital away from a country," says Utkarsh Sinha, managing director, Bexley advisors. Tarun Bajaj has recently questioned the rationale for only 10% tax on long-term capital gains.