DTC: Investor Perspective!

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We have had all kinds of experts analyse the direct tax code; tax consultants, tax lawyers, corporate counsels, CFOs. India's best known investor and Dalal Street guru Rakesh Jhunjhunwala and Mukesh Butani of BMR analyse the direct tax code and its proposed changes to the capital gains tax regime.
The direct tax code does propose a paradigm shift in the taxation of capital gains. It says all capital gains to be taxed as income and it does away with Securities Transactions Tax (STT). So, how is this going down with the investor community? Well-known investor Rakesh Jhunjhunwala and tax expert Mukesh Butani, Partner of BMR Advisors discuss.  
Here is a verbatim transcript of an exclusive interview with Rakesh Jhunjhunwala and Mukesh Butani on CNBC-TV18. Also watch the accompanying video.

Q: What do you make of the proposed changes in the direct tax code when it comes to the taxation of capital gains; the fact that there would be no distinction any longer between long-term and short-term, the fact that we at 0% long-term will now go away and that all capital gains will be taxed as regular income. How much is that going to hurt investor's sentiment? Do you think its going to make a big dent?

Jhunjhunwala: First all it's a misconceived concept that today there is no capital gains tax. There is a capital gains tax in the form of Securities Transactions Tax (STT). So, the question is, I agree with the basic approach and the equation of the direct tax code that lesser exemptions, lesser rate of tax. But the real debate is, there should be shift from STT towards the regime of capital gains and if I were to decide there are two exchanges who pay 99% of the STT and it comes every month within seven days, government needs no administrative machinery to implement it and as time passes volumes are just going to go through the roof and the STT is going to go through the roof. Second thing I feel that this country really needs risk capital and worldwide risk capital always gets concessions; it's not unique to India and in this proposed direct tax code there is no capital gains, there is only income. So, what is a difference between debt investing and equity investing or any capital investing? So, in a state in which the country needs large capital investments needs risk capital. You want to take away all the benefits, I think we should continue the STT and we should have the short-term capital gains at whatever rate is there and the long-term capital gains fully tax-free.
Q: If this code were to become law as is, what do you think is likely to happen on April 1, 2011 or just the day before that. Do you think that investor sentiment will turn dramatically or are we all being exaggerated in our forecast?

Jhunjhunwala: I surely know one thing that if the tax code is introduced in the form in which it is then between January 1, 2011 and March 31, 2011 there is going to be a slaughter in the markets. If I hold equity, if I sell on April 1, I am taxed and if I sell on March 31, I am not taxed. So, obviously I would like to book my gains without being taxed. This is also question we have to point out.

Q: How do they do it across the world? I mean most countries do apply or levy some kind of capital gains tax, so is our tax department so wrong, wanting to bring back some measure of taxation on capital gains most of which in that sense enjoying a 0% tax when it came to long-term gains and also let me ask you the question that Rakesh brought up that STT was a great tax; it was easy to administer, impossible to wade almost. So, why are they doing away with that. Are they likely to collect a lot more money in the way that they are trying to impose capital gains tax in this code and is the revenue consideration, the only consideration in this?

Butani: I don't think revenue consideration is the only consideration. They will probably collect more securities transaction tax if the volumes increase. I think there are three phases in which the capital gains tax regime as it is evolved today. In 1992 when the government announced the foreign institutional investor (FII) policy immediately thereafter in the '93 budget Dr. Manmohan Singh said that FIIs are an important source of investment in our country and we should tax them in a concessional manner and thereafter the Bhartiya Janta Party (BJP) government brought about a change which said that long-term capital gains should not be taxed and then came the last set of reform by Mr. Chidambaram when he said that rather than going through this complex system of collecting taxes, lets collect Securities Transactions Tax because you tax it in a simplified manner and as Mr. Jhunjhunwala said, the whole collection machinery is so simplified that the tax administrator have to pay for nothing to collect those taxes. I think in the garb of simplifying the taxes we have complicated it. We are now talking about a very complex set of distinction between what is an investment asset, what is a business asset. The business asset has again two categories. I think this whole concept is not going to work in my view; its going to cause enormous amount of confusion because as it is, it is very difficult to classify whether a particular asset is a business asset or as an investment asset. 

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