Claiming that the imposition of the long term capital gains (LTCG) tax protects the “small retail investors” and keeps a “financialisation of corporate savings” in check, finance secretary Hasmukh Adhia said on Sunday that keeping one set of investments outside the tax net would give rise to a “potentially dangerous situation.”
“Lot of people used to tell us, please, there is one very good story going in India of the stock market becoming bullish. Don’t disturb that good story. Then there were others who used to tell that this is the best time to do it… We have not disturbed it (the stock market) at all… Look here, you tell me. Is there any logic of keeping one class of investments, completely out of the tax net,” Adhia said while addressing a gathering at the Indian Institute of Management here. He said that the stock market has been giving about 15 per cent returns for the last few years.
“The finance minister in his speech has mentioned that in FY17 — which is reported in 2017-18 assessment year — the companies and individuals have reported long term capital gain of Rs 3.67 lakh crore and we analysed it further, most of it is earned by corporates and trusts; very little by individuals,” Adhia said.
“The corporates are very happy investing their surplus money in mutual funds and equity markets of other companies, rather than using that surplus to create a new manufacturing company… So what was happening was financialisation of corporate savings, which is not a good thing for the economy. So we decided to do it, 10 per cent to begin with and we also said that for small investors whose gains are up to Rs 1 lakh per annum, long term capital gain will be exempted… so the small retail investors are protected,” he added.
Adhia said the imposition of LTCG was done in a “mild and modest way and without disturbing the stock market.” He felt that the crash of the Sensex after LTCG tax was due to fall in global markets. “But if you do not do this and you allow one set of investments to be so attractive that the whole world runs towards it then it is potentially dangerous situation. All we are saying is … if you are earning 15 per cent in long term capital gain, then we are saying give 1.5 per cent to us that’s all. 13.5 per cent return is still there,” he added.