Capital gains tax hike a sentiment spoiler; revised exemption limit of Rs 1.25 lk paltry, says Shankar Sharma

He criticized the modest increase in the exemption limit from Rs 1 lakh to Rs 1.25 lakh as insufficient and linked it to a palliative measure.

Shankar Sharma, founder of GQuant, said he was unhappy with the recent hike in capital gains tax announced in the Budget. In an interview to Moneycontrol, Sharma, a seasoned market veteran, criticised the increase as unnecessary and detrimental to investor sentiment.

"I'm not happy.," he said. "We don't have an increase in the capex budget, but we have an increase in my tax budget. A 20 percent increase in tax for long-term and a third increase in short-term gains are significant. This kind of tweaking isn't required," he added.

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Finance Minister Nirmala Sitharaman has hiked the long-term capital gains tax from the current 10 percent to 12.5 percent while also increasing the short-term capital gains tax from the current 15 percent to 20 percent. More importantly, the increased tax rates will be implemented with immediate effect.

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Sharma pointed out that the tax increases come after a period where equity market investors already faced challenges. "From 2014 till March 2020, the government delivered risk-adjusted returns lower than fixed deposits. The market was hit hard following the imposition of the long-term capital gains tax from 0 percent to 10 percent," he said. Sharma also highlighted that in 2019, India was the 18th worst-performing market globally, a direct consequence of the capital gains tax introduction.
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He criticized the modest increase in the exemption limit from Rs 1 lakh to Rs 1.25 lakh as insufficient and linked it to a palliative measure. "I don't see the purpose of these changes. For equity market investors, just because they've had three good years doesn't justify these increases," Sharma said.

Addressing the impact of the tax hike on the attractiveness of equities, Sharma remained cautious. "Markets have run up a lot, and they look for reasons to correct. Incremental bad news can have a disproportionate effect. This tax hike is an unnecessary sentiment spoiler when things are going well."

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