Let there be long-term gains: Economic Survey 2018-19

The government should revisit the capital gains tax framework to promote longterm investment culture, the Economic Survey said, leaving the markets guessing whether rates and definitions related to taxing capital gains would be tweaked in the Budget.

Capital gains tax, the survey said, has significant economic consequences for individual investors in terms of lock-in effects. It added that an optimal tax policy would be fair in a way that genuine investors are encouraged.

Tax experts say this reference of the survey is a hint at the urgency to hike tax on short-term (that is, one year) gain on stocks, or lower tax on long-term gain, or allowing capital gains from the stock market to be reinvested in a less risky long-term asset for tax benefit. Unlike in property investment where tax can be avoided by reinvesting the quantum of capital in another property or specified instruments, there is no such provision for stock investors.



Some market participants believe the survey is also in favour of redefining short-term beyond one year. Short-term capital gains (STCG) for listed stocks is 15 per cent while the long-term capital gains (LTCG) rate is 10 per cent — keeping the tax incentive for holding stocks longer at only 5 per cent. Two years ago, LTCG was free of tax. Listed equities enjoy a privileged tax treatment over other asset classes such as real estate and unlisted shares, where the tenure of investment has to be at least three years to qualify for long-term benefits.

“The survey has surprisingly spoken about capital gains tax. Based on this, one could guess a possible rejig in terms of definition of LTCG and STCG,” said Amit Singhania, partner at law firm Shardul Amarchand Managaldas. “However, the distinction between long- and short-term for listed securities is necessary since it motivates and rewards to stay invested for more than a year,” he said.

According to Sriram Krishnan, MD, Deutsche Bank, compared with capital gains tax, a transactionbased levy (like securities transaction tax) has had better acceptance in many other markets. “Also, investors should be further incentivised for putting money in certain sectors (such as infrastructure) based on end use of capital,” he said.

The survey comes amid representations from market participants for a more relaxed framework on capital gains tax in listed equities.

“Since India needs investments, capital gains tax should be used wisely to foster and encourage innovation,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates. “For equity shares, indexation should be allowed so that the cost prices can be raised. Right now, the tax rate (long term gain) is 10 per cent without indexation.”