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Will Equity Capital Gains Be Next in Line for Higher Taxes?

 The recent amendment to the Budget, which taxes all income from debt mutual funds (MFs) as short term, has raised concerns among investors about whether equity is next in line to suffer a similar fate. Bloomberg reported last week that if the BJP government returns to power in 2024, it may consider a higher tax on equity capital gains, particularly on high-income earners. While the government has denied any such move, the idea has been sown in the public’s conscience.

The unequal tax treatment in debt, where bank fixed deposits are taxed at the same rate as MF debt schemes, has been rectified. However, it raises the question of whether the same logic should apply to equity capital gains. After all, both equity and debt are sources of capital. If short-term capital gains on listed equity are taxed at 15 percent, should long-term gains be taxed at the same rate?

While it remains to be seen how changes to tax rates will influence investment decisions, the government may consider a higher tax on long-term capital gains in equities. However, it should take an incremental approach so that it can correct course based on experience. A slightly higher rate of tax on long-term capital gains, which could be universal or applicable above a certain threshold of income, could be the first step in the process.

It is crucial to maintain a competitive capital gains tax regime to attract and retain equity investors, especially retail investors. The really wealthy ones can easily change their tax residency, but retail investors would be left burdened with high tax rates. Equity investors provide risk capital, which gives entrepreneurs the ability to invest in growth plans and contribute to economic growth.

In conclusion, while debt and equity are different, it is important to maintain parity between short and long term, between debt and equity. The government should also be mindful of the potential impact on investors and the economy when considering any changes to tax policy.

Highlights:-

·         Government amendment to Budget taxes all income from debt mutual funds (MFs) as short term

·         Trial balloon floated about higher tax on equity capital gains for high-income earners if BJP government returns to power in 2024

·         Unequal tax treatment in debt - bank fixed deposits taxed regardless of length of investment, whereas MF debt schemes taxed at lower rates for long-term gains with indexation benefit

·         Can same logic apply to equity capital gains, or should both sources of capital attract same rates of capital gains tax?

·         FY24 will show how changes to tax rates influence investment decisions in bank FDs and debt MFs

·         Government slashed corporate tax rates in 2019 to boost corporate investments, but may shift benefit to companies and ask investors to share gains

·         Equity investors put money behind promising bets despite risk, providing entrepreneurs with risk capital for growth plans and economic growth

·         Competitive capital gains tax regime crucial to attract and retain equity investors, particularly retail investors

·         Incremental approach needed for equities to correct course based on experience, starting with slightly higher tax rate on long-term capital gains

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