Definition of long-term could be widened to align the investment lock-in threshold with many matured economy markets; new rule may be compatible with amended tax treaties with Mauritius and Singapore
The government may change the definition of “long-term,” raising the time limit for capital gains tax relief to a minimum of three years from one year at present.
There is, however, no plan to introduce a long-term capital gains tax on stock trading.
A change in the definition of “long-term”, if announced in the budget for 2017-18, could likely prompt millions of individuals who trade in stocks to shuffle their savings portfolio.
Under current rules, gains made on a listed company stock are tax free is the investor exits after a year. The changed definition, however, would imply that investors—both retail and institutional—will have to pay 15 percent tax on the premium or gains made if the stock is sold within three years.
If implemented, the revised definition will align the rules closer to many matured economy markets where threshold for “long-term” investment lock-in is set at three years or above.
The argument in favour of a longer holding period is that it will help retail investors avoid panic selling when markets are volatile because of external conditions, sources indicated.
The move, however, could adversely affect domestic institutional investors who move around their portfolio many times in three years seeking higher returns. These investment decisions are backed by research that generally tracks a 52-week return history.
The new rule could call for a major overhaul of institutional investment portfolio that runs into thousands of crores of rupees. This reallocation can potentially dry out funds for the stock market in the short-term adding to the current volatility.
Long-term capital gains was made tax exempt back in 2004. This was based on the premise that there was a need to bring parity with the tax exemption given to investors coming through Mauritius.
Last year, India signed amended double-tax avoidance agreements (DTAAs) with Mauritius, Singapore and Cyprus. Under the new treaties, India will levy capital gains tax on investments routed through these countries, effectively clamping down on tax dodgers who used to route investments through `shell’ or paper companies registered in the South east Asian nation.
Last month, finance Minister Arun Jaitley clarified that the Centre has no intention to impose tax on long term capital gains in the stock market.
Jaitley’s clarification came shortly after Prime Minister Narendra Modi said that the contribution to the exchequer by security markets participants is low.
“Those who profit from financial markets must make a fair contribution to nation-building through taxes,” Modi said at an event in Mumbai late last month.
Modi’s remarks were seen by many as an oblique hint that the government intended to impose a long-term capital gains tax on stock trading.
Jaitley later clarified that “this interpretation is absolutely erroneous, PM had made no such statement directly or indirectly. This is not what the PM said, nor is it intention of the government as reported”.