Dear Reader,
The day after the Budget, the primary topic of conversation is the increase in taxes on all aspects of trading and investing. While big and small traders are complaining about the tax hikes, the investor community and government authorities are welcoming the move.
In her Budget, Finance Minister Nirmala Sitharaman raised long-term capital gains (LTCG) tax on financial and non-financial assets from 10 percent to 12.5 percent. Short-term capital gains (STCG) will now be taxed at 20 percent, up from the previous 15 percent.
The finance minister increased the Securities Transaction Tax (STT) from 0.02 percent to 0.1 percent, a fivefold increase in F&O trades.
Investors and government authorities believe the tax increases are modest, with potential for further hikes. The rise in LTCG from 10 percent to 12.5 percent is minimal and affects only a small portion of participants, as only one percent of traders in India pay LTCG. Most of those affected are in the HNI segment, meaning the impact on retail traders will be negligible.
However, by this logic, participants with a holding period of less than one year will feel the brunt of the tax increase. Authorities have justified the increase in STCG by stating that widening the gap between LTCG and STCG will encourage participants to hold their investments for more than one year.
This may sound good in theory, but how many traders and investors participate in the market primarily to take advantage of tax arbitrage. Similarly, the rationale behind increasing STT was to curb retail activity in the derivatives segment. While NSE CEO Ashishkumar Chauhan appreciated the increase in STT, calling it smaller and lower than expected, most others did not support this hike. Government authorities and fund managers, who prefer traders to divert their money to them, welcomed the move. However, in their representation to the finance minister before the Budget, brokers had asked for the abolition of STT.
Ironically, the NSE has introduced weekly index options for retail investors, which attract the highest trading volumes.
Retail investors are feeling cheated by the government's multiple tax increases. The Securities Transaction Tax (STT) was introduced in 2004 to replace the LTCG tax. This arrangement continued until 2018 when Sitharaman reintroduced LTCG without removing STT. In this Budget, the FM increased both taxes, making trading and investing more costly.
Due to these taxes and the high cost of trading, many high rollers are relocating to other countries, particularly Dubai, to benefit from lower taxes. These traders have the option to leave, which they are exercising. Unfortunately, retail traders do not have the same flexibility and will either continue to trade in the market or move their trading activities underground.
The Indian trading and investing community suffer in all scenarios. What exacerbates the situation is the government's open-door, low-to-zero tax policy in GIFT City. The government wants foreign traders to come to India, make money, and leave without paying taxes. Unfortunately, the same courtesy is not extended to Indians.
Meanwhile, Vijay Bhambwani writes on how to capitalise by trading in a high-cost environment.
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