long term capital gains tax: Long-term capital gains tax. Will the government do any tinkering in FY24?

From the concept of having capital gains exemption at 50 times the per capita income (~15k in the 60s) to the introduction of capital gains based on the 20% LTCG bracket at the time of India’s liberalization, the policy has been changing.

Since the 90s, in the last 3 decades we have flip flopped from 20% to 10% to zero, then back to 10% and again with an exemption of 1 lakh etc.

The dividend tax treatment also has been going back and forth with earlier dividends being taxed for shareholders, then exempted but companies pay for dividend distribution tax and then recently above 10 lacs dividend be taxed at slab rate.

The short-term capital gains tax has also gone from slab rate to 10% to 15% at current levels. All these changes were just in the equity segment.

Enormous amount of different capital gains policies exists for other asset classes viz bonds, gold, real estate crypto etc.

In my opinion and recommendation, the need of the hour is to go for Simplicity. The government
can bring all long-term assets under one regime to simplify the current ad hoc complicated law.

Stocks, bonds, gold and RE can be brought under a 15% no indexation benefits and a 20% regime with indexation benefits, which means that roughly if stocks are held for 7 years the effective rate will still be near 10%.

The dividends on equity should remain tax free as already the corporates are paying the dividend distribution tax.

The time period for long term and short can also be brought to a common 24 months. The current short-term rate of 15% can also be continued.

The fact that the last few years have seen a massive growth in the capital markets participation and rise of the index levels is also not a positive background to expect any capital market related doles from the government. The government is likely to help sectors that are in distress and not the ones that have flourished in the recent years. To that extent, an increase of net taxation remains a worry.

One key area of concern for me is also the Securities Transaction tax. The STT was first introduced as a replacement of the long-term capital gains tax.

Later while the STT remained embedded in the system, the long-term capital gains tax also made a comeback. This in some sorts was not fair to the investors to have been paying both.

A wish list to the FM always remains for removal of the STT so that the cost of transaction can compete to be the lowest in the world.

The markets are all about liquidity and efficiency and in that respect this STT is a roadblock for more efficient dynamics in the markets.

Tax cuts will be difficult as we are still recovering from the Covid dent and any net increase in tax if not done that itself will be the silver lining IMHO.

Of course, this is all speculation and there is really no basis except the logic of simplification to justify this. The past many budgets have shown that the current government does believe in simplifying things albeit the success in the same is not yet forthcoming.

The best part about the current set up is that they have been bold on the corporate tax front and that has initiated a huge manufacturing orientation to the economy.

Given that this is the year before election year 2024, it is expected that the budget will be oriented largely towards the rural and agriculture dynamics with more loan waivers, subsidies and doles for the poor.

The running food program for 800M people is also likely to continue till the election are over and hence taxation will likely remain stiff and non-dovish in my opinion.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

(The Author is Smallcase manager and Founder, Weekend Investing)