The continuing fall in stock markets is linked to a global selloff and not the levy of Long Term Capital Gains (LTCG) tax, which was reintroduced in this Budget after a gap of 14 years, according to Finance Secretary Hasmukh Adhia.
Adhia also said that it was not a good idea to leave one class of assets completely out of the tax net as that would lead to people parking funds in an asset where there is no tax incidence.
Speaking at a post-Budget meet held by PHD Chamber of Commerce and Industry Tuesday, the Finance Secretary warned that rise in asset valuations not backed by fundamentals is a potential risk for investors, particularly small investors.
“If you exempt any one out of the 4-5 classes of investments completely out of taxation, then it is very much possible that most people would like to park their funds in such an asset which has got no tax incidence. And if the supply for money is too much for one asset class, naturally the valuations would increase of that particular class because the demand is more and the supply is the same,” he said.
“So what happens is that there’s too much of money chasing the same kind of shares so because of extra inflow the asset valuations keep on increasing and sometimes these asset valuations may not be reflecting the fundamental stand of the companies in which they are invested. It’s a potential risk also, particularly, to the small investors and so, it is not a good idea to keep one class completely out of taxation,” said Adhia.
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The senior official said that the government has grandfathered capital gains from investments made 3 or 6 months ago or a year or 2 years ago. “…it is only the future gain that we are talking about that any capital gain that will start accruing to you now onwards will be taxed and that is also going to happen only after one year is over. But if you sell an asset which is five-year old after six months, then on the 5-year gain, there will be no tax. On the sixth-month gain only there will be a tax. There will be a minimum tax this year that you will have to pay.,” he said.
Adhia said the decline in key stock market indices is primarily due to the global market meltdown over last few days and not due to the imposition of long-term capital gains tax.
“On February 1, even after declaring long term capital gains tax, at the end of the day, the market was okay, there was only a minimal disruption on February 1. What happened on February 2 and February 5 was mainly because of (the) global shake-up…of course, there is a ripple effect of whatever happens in the world on the Indian stock market. Most of it is because of the global market otherwise the Sensex and the Nifty would have come down on the first day itself, but the second day onwards, the effect of mellowing down came on our markets,” he said.
Adhia said the government doesn’t want to undermine the role that stock markets, investors and brokers play in the financial intermediation sector. He said the timing of the LTCG levy has been unfortunate but the government has tried to ensure that there is no jerk by grandfathering the investments.
“Unfortunately, it came at a very wrong time in the sense that of course, we couldn’t have changed the Budget date, we had to put it in the Budget. But, the global meltdown in the stock exchanges came at a very wrong time for us. We had to time our thing as per the Budget only but the other thing came at a wrong time,” Adhia said.
Finance Minister Arun Jaitley had in his Budget speech announced that all long term investment gains of over Rs 1 lakh, beginning February 1, 2018 will attract a long term capital gains tax at the rate of 10 per cent. However, all gains made up to January 31, 2018, have been grandfathered, implying that no tax will be imposed till that date.
The Central Board of Direct Taxes in a set of FAQs has clarified that new tax regime will be applicable to transfers made on or after April 1, 2018, and the transfer made between February 1, 2018 and March 31, 2018 will be eligible for exemption under clause (38) of section 10 of the Income-tax Act. Currently, the government imposes a 15 per cent tax on short term capital gains made on sale of shares within a year of purchase.