Skip to main content

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

Comments

Post a Comment

Popular posts from this blog

Foreign Inflows Fuel Indian Market Surge: A Weekly Market Update

  Dear Reader, Foreign Portfolio Inflows Propel Indian Markets The Indian markets experienced a surge in foreign portfolio funds, propelling the Nifty to conquer Mount 19k and even target Mount 20k. Inflows into India Equity Funds reached their highest level since Q2 2015, while India Bond Funds also saw a record weekly inflow until July 12. De-Sinofication and Asian Stock Rush One major factor behind the inflows is de-Sinofication, as Western investors turn away from China and seek opportunities in other Asian markets. This shift in flows has been driven by disappointment over China's recovery, leading foreign investors to seek refuge in Asian stocks. US Dollar's Impact on Emerging Markets The weakening US dollar has been bullish for emerging markets, including India. Renowned strategist Stephen Jen predicts further USD depreciation, signaling potential growth for emerging markets. However, some experts caution that the current environment differs significantly fro
Post a Comment
Read more

India's Retail Investors Face Uncertainty as Earnings Season Brings Risks and Rewards

  Indian retail equity investors are facing some uncertainty with the weakening of foreign portfolio flows and ongoing macroeconomic worries. However, retail investors invested a net Rs 20,534 crore into equity mutual fund schemes in March.  The recent pause by the RBI’s Monetary Policy Committee, this week’s low CPI inflation print, and India’s brighter economic prospects are bringing hope to investors. However, some investors have cautioned that stock valuations are not factoring in the risk of negative surprises in earnings. In this regard, TCS and Infosys’s results were disappointing, and their management commentary was bleak, indicating that the software industry may face a slowdown. Nevertheless, sudden turns and twists in the global economy could mean an upward revision to estimates, which could entice buyers. The effects of these results may be felt in different ways. For instance, a slowdown in hiring by one of the largest employers of India’s skilled and upwardly mobile wor
Post a Comment
Read more

Banking Sector Earnings Outlook

Welcome to our weekly newsletter, where we bring you the latest insights and trends from the world of finance. This week, our focus is on the upcoming quarterly earnings season, with particular emphasis on the banking sector. It appears that listed firms are poised to deliver another impressive set of numbers, although the pace of growth may vary across sectors. Amidst the noise and excitement, we have identified two key data points that can provide valuable insights for investors. Data Point 1:   Loan Interest Rates The share of loans with interest rates of 9 percent and above has risen to 56.1 percent as of January-March FY23, up from 39 percent in the previous quarter (FY22 Q4). This data point highlights the scope for bank earnings this season. Banks generate revenue by charging interest on loans they provide and paying interest on deposits they receive. The difference between the two is their earnings. While the potential for further lending rate increases is limited, as much of
Post a Comment
Read more