Last week, when asked to explain the rationale behind the reintroduction of the long term capital gains (LTCG) tax, finance secretary Hasmukh Adhia said, “This is a gain which is not accruing from any effort, but is just an investment gain. It is only reasonable that we look to get some revenue from this class of income”. Adhia’s remarks came after the Sensex crashed by more than 800 points, a day after Finance Minister Arun Jaitley presented the budget for 2018-2019. The finance secretary has tried to delink the market crash from the LTCG tax and has described the tumult in Indian bourses as a ripple effect of the decline in global equity markets. The finance minister’s budget speech did coincide with a fall in global equity markets. But it’s also correct that the savings ecosystem in the country is in the midst of a significant transition — after decades of relying largely on fixed deposits, middle-class investors are shifting funds to assets such as stocks and bonds. The argument that making such investments does not require any effort harkens to an era when markets were under-appreciated entities in the country’s policy-making circles and sentiments at stock exchanges were viewed as alien to economic realities.
In 2004, the then finance minister P Chidambaram scrapped the LTCG tax to encourage household-level investors to shift their savings to market-related instruments — largely stocks and bonds. Since then, the change in the middle-classes savings portfolio has been slow but appreciable. According to the Association of Mutual Funds In India (AMFI), an industry body, the assets under management of the mutual funds industry have grown from Rs 3.26 lakh crore in 2007 to 5.87 lakh crore in 2012 to 21.27 lakh crore by the end of last year. The Reserve Bank of India data shows that the proportion of fixed deposits dropped from 5.8 per cent of the GDP in 2014 to 4.7 per cent in 2016. The change in the country’s investment landscape is, however, still in the making. Senior citizens, for example, still prefer the safety of traditional instruments such as fixed deposits. India has only 3 crore equity investors. But it is also significant that exposure to stocks and debentures rose from about Rs 41,000 crore in 2015-2016 to about Rs 1,82, 000 crore in 2016-2017. The finance secretary’s explanation for the reintroduction of the LTCG, therefore, belittles an important development in the country’s savings culture. After all according to AMFI, almost a fifth of mutual fund investments today come from small towns.
Mercifully, fiscal policy-making in the country has evolved from the times when wealth — and wealth creation — were regarded as immoral. The finance secretary should reflect on his statement. More importantly, the government should reconsider the LTCG tax.