Modi Brings Back Long-Term Tax on Stock Gain to Lift Revenue

Updated on
  • Shares pare intra-day losses as investor digest tax changes
  • Funds flushed with cash to buy on dips, Motilal Oswal CIO says

The Big Numbers to Watch as India Unveils Budget

Prime Minister Narendra Modi’s government proposed to revive a tax on equity holdings 14 years after it was scrapped to boost revenue.

Profit exceeding 100,000 rupees ($1,565) from shares held for more than a year will be taxed at 10 percent, Finance Minister Arun Jaitley told lawmakers in New Delhi Thursday. Before today, gains from equities held for more than 12 months were exempt from tax.

“The return on investment in equity is attractive even without tax exemptions,” Jaitley said. “There is therefore a strong case for bringing the long-term capital gains from listed equities in the tax net.” Gains up to Jan. 31 from the sale of shares are exempted, he said.

The benchmark S&P BSE Sensex dropped 0.2 percent at the close in Mumbai after fluctuating between a gain of 0.8 percent and a loss of 1.3 percent, as investors digested the change.

“By global standards, 10 percent capital gains tax is not that prohibitive,” Taimur Baig, managing director at DBS Bank Ltd. told Bloomberg Quint. “There are many countries who have had very successful capital gains regimes with significant degree of compliance and at much higher rate. It will not be a big deal at all.”

Stock brokerages including Kotak Securities and CLSA India Pvt. had said in the run up to the budget that the government may make it harder for investors to claim exemptions on capital gains from equity investments as Modi’s move in 2016 to scrap high-value currency bills and the implementation of the new sales tax last July had hurt demand and revenue.

There was concern that a move to end the tax break could upend the euphoria that’s lifted Indian equities to multiple records in the past six months and affect flows from individual investors, who’ve flocked to mutual fund since Modi swept into power in 2014. The Sensex soared 28 percent in 2017, beating the S&P 500’s 19 percent advance, as local funds bought a record $19 billion of shares, more than double the inflow from overseas.

Buy The Dip

“There is a ton of cash sitting on the side, waiting to buy into every drop,” said Manish Sonthalia, chief investment officer of portfolio management services at Motilal Oswal Asset Management Co. in Mumbai. “Unless there’s something really fundamentally serious, I don’t expect a steep correction.” The decision to tax gains after Jan. 31 is a “big relief,” he said.

India in July 2004 abolished long-term capital gain tax on shares and replaced it with the securities transaction tax, a same-day tax credit system that’s easy to administer as it applies to all trades done on an exchange. The STT brought in about 90 billion rupees last fiscal, compared to the 200 billion rupees Jaitley said he expects to garner from long-term capital tax in the year to March 2019.

Still, bringing back the long-term tax while retaining STT has raised concerns about double taxation. Jaitley told the state broadcaster that the overlap “issue is on the table” and that it could be reviewed in future.

Flows to mutual funds may still get hit as Jaitley has proposed a 10 percent tax on dividends from stock funds. The move, he said, would bring parity across growth-oriented and dividend distributing funds.

Still Attractive

“The distribution tax will mainly affect customers from smaller towns and cities, and there may be a significant slowdown in inflows,” said Ajay Srivastava, managing director at Dimensions Consulting Pvt. in New Delhi.

Investors will absorb the tax changes given the fading popularity of gold and property -- the traditional favorites -- after the 2016’s cash ban, according to UTI Asset Management Co.

“Given the way the government proposes to implement it, it may not have any destabilizing impact on the markets,” said Vetri Subramaniam, head of equity funds at UTI. “Even after the 10 percent tax, equities remain attractive compared with other asset classes.”

— With assistance by Dhwani Pandya, and Vrishti Beniwal

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