Read and find out in today’s Smart Mornings Indian equity tax system is not flawed. It’s just messed up! No, we’re not criticizing the present government or the past ones in particular. We’re just saying that multiple tax deductions without much value addition make no sense at all. This is just logical. Isn’t it? You would have heard manier times that India doesn’t invest in equity like the world does. In fact, the global average of investing in stock market is close to 40% whereas in India it is hardly 3%! Besides people’s perception that stock market is a risky ball game, the aforementioned issue adds to potential investors’ woes.
What's the Current Structure?
Long Term Capital Gains (LTCG) are currently taxed at 10%. This wasn’t the case an year ago (tax on LTCG was announced in 2018). The tax on Short Term Capital Gains (STCG) are taxed at 15%. These LTCG and STCG slabs are applicable for equity oriented schemes. Besides this, there’s a Securities Transaction Tax (STT) that’s levied on sell transactions. Also, there’s a Dividend Distribution Tax (DDT) which the companies pay while paying out dividends. S
o far, so good. But, in the next section we’ll come to the problem.
About the Mess...
Remember the time when GST was being introduced? Government said that multiple layers of taxes are cumbersome to handle and also they are insignificant. Something similar is happening in case of equity tax structure. Here’s how. A company pays taxes on its turnover. After that, when it comes to distributing dividends from the leftover part (profit after tax), it has to pay dividend distribution tax. The shareholders are not spared either. When they sell their shares, they pay a securities transaction tax. And, based on their holding period they pay LTCG tax or STCG tax. All this, over the income tax that they pay (depending on slab). What Needs to be Done? Let’s get back to square. We started from the point that equity investing is not popular in India. Now, it is clear from the situation that taxation is another factor which adds to the investors’ or even potential investors’ woes.
So, to make investing more attractive and rewarding, one step which the government can surely take is ‘Completely Removing’ LTCG tax. Long term investing needs to be promoted, otherwise the stock market will continue to be perceived as risky and unattractive. In order to promote the value investing or long term investing, LTCG’s abolition will play a very important role provided the government thinks the same way.
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