New Delhi: After a gap of 18 years, the government on Thursday imposed a 10 per cent tax on long-term capital gains made in the share market, with a view to curbing tax evasion.
Also, 10 per cent tax has been levied on distributed income by equity oriented mutual funds.
The Budget announcement by finance minister Arun Jaitley sent stock markets into a tizzy, with BSE Sensex plunging over 400 points in the noon trade. Markets, however, recovered later in the day and closed with modest losses.
"I propose to tax such long-term capital gains exceeding Rs 1 lakh at the rate of 10 per cent without allowing the benefit of any indexation. However, all gains up to January 31, 2018, will be grandfathered," Jaitley said while unveiling the 2018-19 budget.
The budget proposal would result in a revenue gain of Rs 20,000 crore in the first year, he said, adding that the realization in the subsequent years could be more.
Currently, 15 per cent tax is levied on capital gains made on sale of shares within a year of purchase. However, long-term capital gains tax is nil for shares sold after a year of purchase.
With the Budget proposal, now long-term capital gains exceeding Rs 1 lakh will be subject to 10 per cent tax.
Tightening of the long-term capital gains provision under the Income Tax Act is an extension of the government's fight against black money, experts said.
The government had in 2016 amended bilateral tax treaties with countries like Mauritius, Cyprus and Singapore allowing Indian authorities to tax capital gains arising out of India.
Prime minister Narendra Modi had in December 2016 said stock market participants should contribute more to the exchequer by way of taxes.
"Those who profit from financial markets must make a fair contribution to nation-building through taxes.... We should consider methods for increasing it in a fair, efficient and transparent way... Now it is time to re-think and come up with a good design which is simple and transparent, but also fair and progressive," Modi had said.
Justifying re-introduction of long term capital gains tax, Jaitley said the return on investment in equity is already "quite attractive even without tax exemption" and therefore there is a strong case for bringing long term capital gains from equities in the tax net.
He further said with reforms undertaken by the government, the equity markets have become buoyant and the total amount of exempted capital gains from listed shares and units worked out to be Rs 3.67 lakh crore as per the returns filed for Assessment Year 2017-18.
"Major part of the gain has accrued to corporates and LLPs creating a bias against manufacturing, leading to more business surpluses being invested in financial assets," he said.
Observing that a vibrant equity market is essential for economic growth, Jaitley said he has proposed only a "modest change" in the present regime.
Referring to 10 per cent tax on equity oriented mutual funds, Jaitley said this will provide a level playing field across growth oriented and dividend distribution funds.
However, there has been no change in the Securities Transaction Tax.
"There is no change in existing STT regime on equity. It stays," finance secretary Hasmukh Adhia tweeted.
STT is applicable on shares, bonds, debentures, derivatives, units issued by any collective investment scheme, equity based government rights or interests in securities and equity mutual funds. STT is levied both on domestic as well as foreign investors.
Nangia & Co Managing Partner Rakesh Nangia said that grandfathering of capital gains till January 31 is "a very well balanced approach".
Ashok Maheshwary and Associates Partner Amit Maheshwari long term capital gains tax will hit savers badly who were shifting to financial assets. "This will give a fresh impetus to immovable property and gold again as investment class," he said.