Why taxing long term capital gains tax is not the best idea

Manuj Joshi 16th March 2018

The government had been proactive in improving the business environment in India through programs like ‘Make in India’ and ‘Startup India’ which have paid decently. The clear testimony of this being the jump in FDI inflows and the uptake of government’s Learning &Development (L&D) module. FDI inflows grew more than 48% in the 12 months following the launch of ‘Make in India’ program compared to the preceding 12 months. On the other hand, 191,000 firms have opted for the L&D module offered by the government under the Startup India program. Other structural reforms taken by this government have resulted in an improvement of India’s position in the Ease of Doing Business (EODB) from130 to 100.

However, with the upcoming general elections next year, the government hadto change its focus to other aspects like agriculture, rural development, health, education, employment, MSME and infrastructure sector. This initiative will not only require a lot of regulatory and administrative changes but it will also entailan increased burden on government’s budget. Additionally, the government aims to maintain the fiscal deficit within the promised bounds of 3.3% in fiscal year 2019.

To increase its revenue generation, budget 2018-19 has introduced a number of reformslike increasing customs duty on products like mobiles, clothing and footwear, imposition of long term capital gains (LTCG) tax on gains made from equities and introduction of a dividend distribution tax. Imposition of LTCG, however, hasn’t been well received. Sensex has been very volatile since the announcement andnervous investors are pulling out their money.

LTCG tax was first removed in 2004 to give a stimulus toequity markets. Additionally, due to the Double Taxation Avoidance Treaty with Mauritius, the FII inflows from Mau...

Note: Views expressed in this blog are those of the author.