By Sunanda Natrajan
With several startling announcements made in his 2018-19 Budget, Arun Jaitley has managed to make quite a mark in the leadup to the 2019 general elections. Indian stock markets have been much sought-after by foreign investors hoping to make quick profits under the new economic regime. However, the imposition of the Long Term Capital Gains tax from the 1st of February 2018 might change things for the worse, according to many expert analysts.
Return of the ‘deadly’ tax
The Indian stock markets have so far been functioning healthily for domestic as well as foreign investors, who continue to invest more and earn more. With competitive rates and profitable returns, the country’s financial industry has grown by a significant amount as more and more people buy a stake in Indian companies.
Unlike Foreign Direct Investments (FDIs), Foreign Portfolio Investments (FPIs) offer investors the possibility to take full advantage of shifts in market valuation. Because securities are traded more easily than other investments, FPIs are more liquid as compared to FDIs. Along with the already existing Securities Transaction Tax (STT), this year’s budget reintroduced the Long Term Capital Gains (LTCG) tax of 10% on profits beyond Rs1 lakh that have been earned from equity investments.
The period between the 1st and the 15th of February witnessed a massive outflow of capital from the country’s markets; approximately Rs 6850 crore. This has come after an inflow of over Rs 13,780 crore in January, which was primarily due to investors using the first month of the year to lock in their profitable investments. In light of the ‘double whammy’ scenario of the imposition of the STT and LTCG, the Indian stock markets are showing signs of slowing down.
What does this mean for investors?
With the 10% tax levied on profits made on investments held for a period of more than one year, the Indian financial market has become significantly less attractive to invest in. Even though the gains earned prior to the declaration are being grandfathered, this is the only mitigating factor to the otherwise adverse after-effect of the budget.
Last year, the fiscal outflows in November and December were the result of a global disinvestment from various stock exchanges. Many experts also blamed the withdrawal of investments on the demonetisation debacle.
However, with the government imposing more taxes this year, foreign investors will find it even more in their interest to pull their capital out and invest it in other markets. This would be a worrisome development given that Indian corporations have always relied on foreign investments to obtain funding because the cost of overseas borrowing is lower than it is at home.
Nevertheless, the government imposed the LTCG for all the right reasons and it may yet prove to be an asset for the nation. When the LTCG was replaced with the STT after 2004, the issue of tax evasion came to the surface due to the small amount of STT that was being paid. Moreover, a 2016 study stated that by replacing the LTCG with STT, the government incurred a loss of around Rs 3.5 lakh crore between 2005-06 and 2011-12.
Until now, tax benefits have been skewed in favour of listed companies, but the introduction of LTCG tax could help to create an equal platform for all asset classes. So far, this change has received mixed reactions from politicians and businesses. Even though the tax is expected to dampen investor sentiments in the short run, it may be anticipated to yield greater economic fruits for the nation in the long run.
Featured Image Source: Flickr
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