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Union Budget 2018: 10 per cent market tax in name of helping real economy

On Thursday, unveiling the Union Budget, Finance Minister Arun Jaitley reinforced this political message when he announced taxation on long-term capital gains from the stock market.

Written by Sandeep Singh , Aanchal Magazine | New Delhi | Updated: February 2, 2018 7:42 am
Finance Minister Arun Jaitley in Parliament to present the Union Budget 2018 Finance Minister Arun Jaitley leaves for Parliament to present the Union Budget 2018 (Express Photo)

When demonetisation was announced, the government’s political hardsell was that the rich were not being spared, that they too would have to stand in queues and come clean on their income. On Thursday, unveiling the Union Budget, Finance Minister Arun Jaitley reinforced this political message when he announced taxation on long-term capital gains from the stock market. And suggested this as part of a strategy to route business surpluses to manufacturing and real economy sectors, away from financial assets.

Announcing the proposal to impose long-term capital gains tax of 10 per cent on gains exceeding Rs 1 lakh arising from sale of listed equity shares or units of equity-oriented mutual funds, Jaitley also proposed a 10 per cent tax on dividend income distributed by equity-oriented mutual funds.

While declaring that all gains up to January 31, 2018 will be grandfathered and not attract tax, the move, Jaitley said, will lead to a marginal revenue gain of Rs 20,000 crore in the first year for the government. But the announcements had an immediate impact on the market which fell by 464 points from the Wednesday closing before retracting.

Jaitley said that with the equity market turning buoyant, the total amount of exempted capital gains from listed shares and units stands around Rs 367,000 crore as per returns filed for assessment year 2017-18.

Finance Minister Arun Jaitley in Parliament to present the Union Budget 2018 The media surrounds Finance Minister Arun Jaitley on his way to Parliament on Thursday, to present the Union Budget 2018 (Express Photo/Renuka Puri)

Stating that a major part of this gain has been accrued to corporates and LLPs, he said, “This has also created a bias against manufacturing, leading to more business surpluses being invested in financial assets. The return on investment in equity is already quite attractive even without tax exemption. There is, therefore, a strong case for bringing long-term capital gains from listed equities in the tax net… I propose to tax such long-term capital gains exceeding Rs 1 lakh at the rate of 10 per cent without allowing the benefit of any indexation.”

While the Finance Minister said that big gains were made by corporates and LLPs, this decision will impact even the small retail investor. For example, even an individual investing Rs 2,000 every month for ten years in mutual funds through systematic investment plan may have to pay LTCG tax as his/her gains may well exceed Rs 1 lakh.

Market experts said the move may disrupt the recent phenomenon of retail investors from small towns entering the equity markets through mutual funds. Data from Association of Mutual Funds in India shows that the net inflow into equity schemes of mutual funds between April 1, 2015 and November 30, 2017 amounted to Rs 2.37 lakh crore. While retail inflow into equities have grown, that from smaller towns has grown at a faster rate.

Data shows that over the last four years, while mutual funds have witnessed their assets-under-management (AUM) nearly treble, the share of the top 15 cities in the entire AUM came down from 87.8 per cent in September 2011 to 84.1 per cent in September 2017. The share of cities beyond the top 15 has risen from 12.3 per cent of the total industry AUM to 15.6 per cent in the corresponding period.

“Rise in markets along with no LTCG helped the industry reach out to investors and attract investments from them. Now, the unique selling proposition (USP) has gone and a 10 per cent tax on equity gains exceeding Rs 1 lakh may disrupt such participation,” said the CEO of a mutual fund who did not wish to be named.

While introducing a 10 per cent tax on dividend distributed by equity-oriented mutual funds, Jaitley said, “This will provide a level-playing field across growth-oriented funds and dividend-distributing funds. In view of grandfathering, this change in capital gain tax will bring a marginal revenue gain of about Rs 20,000 crore in the first year. The revenues in subsequent years may be more.”

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    Feb 2, 2018 at 10:21 pm
    Long term capital gain tax is one of the best part of budget 2018. On one hand we have large no. of farmers, pakodawallahs, etc. who barely survive hand to mouth. On the other hand we have people who make money only by speculation. This tax should not be removed in coming years. Finance Minister should amend few things to counter anger among middle class when budget is discussed in Parliament: --Reduce long term capital gain tax for senior citizens from 10 to 5 who do not receive any regular monetary support from government.--ALL citizen should be given exemption of Rs.50000 per year on income from interest, small savings scheme instead of giving it only to senior citizen. -- The increase in education cess should be rolled back. In fact there should be no cess at all. -- Finance Minister should change ad-Valorem basis of taxation on petroleum products to specific taxation. Ask GST council to formulate a plan within three months for inclusion of petroleum products under GST.
    1. Employ Ment
      Feb 2, 2018 at 3:30 pm
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      1. S
        sharath kumar
        Feb 2, 2018 at 3:01 pm
        "10 per cent market tax in name of helping real economy!" How about helping real people who are making a living out of getting ry? First of all, employees are paying tax and to save on tax, they invest in mutual funds, which is locked for 3 years, on top of that there is again 10 tax from Jan 2018, why the heck invest, when if i need the money urgently i can't even pull out until each investment or bulk investment, until it finishes 3 years? Tax for ry, Tax for Mutual funds, Tax on EPF interest? Governemnt is just looting people hard earned money by the way taxing where ever they can. Wondering why today share market dropped so much today, but now i know.
        1. M
          Feb 2, 2018 at 7:45 am
          Wish we had a newspaper supporting majority Indians.
          1. Meenal Mamdani
            Feb 2, 2018 at 7:30 am
            Very good move. LTCG applies only when the person sells the units in the mutual fund. Since it applies only to gains above Rs 1 lakh, it shields small investors. Most countries have this tax. Even USA, the mecca of capitalism, levies 15 tax on LTCG.
            1. S
              Feb 2, 2018 at 9:33 am
              Not everyone who invest in MF is rich! I'm from middle class self-employed. I'm already paying direct tax indirect tax DDT (Divided Distribution Tax) STT (Securities Transaction Tax) Road Tax Water Tax House Tax Tax on Petrol Custom Tax on electronic goods ....... !!!
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