The government has approached tax advisers and experts on the possible implications of removing tax on long-term capital gains (LTCG) introduced amid much criticism in the FY19 budget. Government officials, tax advisers say, are considering options to attract more foreign long-term investment and one proposal is to do away with LTCG tax on listed equities.
The government may also tweak the definition of ‘long term’ from a year to two years, people with knowledge of the discussions said. Currently, 10% tax is levied on LTCG.
The removal of LTCG tax is in line with Prime Minister Narendra Modi’s speech in New York in September last year where he promised foreign investors that the government was working towards “bringing tax on equity investments in line with global standards”. Many key countries around the world don’t have LTCG tax, experts said.
A person involved in the discussions said the government wants to differentiate between a strategic investor and a short-term investor.
FPIs Reached Out to Govt
“It will be a tough sell to merely slash LTCG two years after it was introduced. But this is crucial for foreign investors and so if the holding period is increased to two years, that incentivises long-term investors,” he said.
“Globally most developed markets with which India competes for capital do not have LTCG. The government has also received suggestions from investor forums and all of them have demanded that such a tax on large investments becomes a tough sell to their own investors,” said another person close to the development. The government had hoped to garner anywhere close to Rs 40,000 crore annually after it introduced LTCG but the collections have been nowhere close, according to the people in the know.
“For the government divestment plans to be successful, a robust capital market is very important. LTCG on listed securities has raised heckles without yielding commensurate revenues. Many FPIs (foreign portfolio investors) and other investors expect LTCG on listed securities given the PM’s assurance in New York that the government will relook at the capital gains tax regime,” said Dinesh Kanabar, CEO of tax advisor firm Dhruva Advisors.
Tax experts say several FPIs had also reached out to the government and sought removal of LTCG. “At least to the extent the government reverts to the earlier position of long-term capital gains exemption, it will incentivise long-term investors such as sovereign, pension, long-only funds, as they mostly stay invested for more than 12 months,” said Sameer Gupta, tax markets leader, EY India.
According to people in the know, several foreign investors have claimed that they will stay away from any divestment plan due to LTCG and other tax-related issues.
Industry trackers are saying the government must also bring parity between holding period of several assets including listed equity, real estate and gold. “How can a one year of holding period be long term? There is an urgent need that we bring parity between holding periods and capital gain tax rates between different assets,” said Kanabar of Dhruva.
The government hopes that a two-year holding period on listed equities would mean that the revenue loss may not be as steep even if the LTCG tax is scrapped. The government is trying to manage the fiscal deficit that stood at Rs 8.07 lakh crore at the end of November last year, 13% above the full-year target, as per the Controller General of Accounts. Revenue collections have been below expectations so far this year. Direct tax collections were estimated at Rs 5.5 lakh crore by the end of September last year, 16% short of the internal target.
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