Market Correction Not Concerning, It's Temporary: Finance Secretary

Amid concerns over the correction in the stock market due to the increase in capital gains tax on shares, Finance Secretary TV Somanathan on Thursday asserted that the fall in the stock market is not a cause of concern for the government.

Somanathan said, "I think these are temporary phenomena, and the stock market responds to various factors. Taxation being raised from 10 to 12.5 per cent I don't think is a major issue, and it's not a source of concern."

Domestic equity investors are disappointed with the change in LTCG (long-term capital gains) in the Union Budget, which has been raised to 12.5 per cent from 10 per cent, with immediate effect.

This is in addition to the increase in short-term capital gains tax to 20 per cent from 15 per cent and the sharp increase in STT on futures and options trades, raising fears that equity investments would be further disincentivized going forward.

As per definition, any profit or gain that arises from the sale of a 'capital asset' is a capital gain. Listed financial assets held for more than a year are classified as long-term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term.

Somanathan stated that taxation on the stock market in India is among the lowest globally.

He argued, "If a businessman is paying far more taxes if we compare to taxes in the stock market, then what is the problem if we increase 2.5 percent LTCG on shares? The Indian stock market is still one of the lowest taxed globally.

For the benefit of the lower and middle-income classes, it was proposed to increase the limit of exemption of capital gains on certain listed financial assets from Rs 1 lakh to Rs 1.25 lakh per year.

Clarifying on the LTCG on property of 12.5 per cent without indexation, Somanathan explained that earlier it was 20 percent with indexation.

Indexation means that the cost at which you bought the property could be adjusted for inflation, which was normally in the range of 4 to 5 per cent per year. However, most properties appreciate at least 15 percent per annum.

"Nobody buys a property to get the same rate as a fixed deposit, they buy property because the interest is more. It has been calculated that for most people, even after removing indexation, the new regime will be better because the tax rate has been drastically reduced from 20 to 12.5 per cent without indexation," he said.

Justifying the new LTCG regime, Somanathan said, "The increase from 10 percent to 12.5 percent for long-term rates on shares is not in isolation. It is done to simplify the entire tax system. Earlier, we had multiple rates and terms for different asset classes. We have tried to simplify it. Now, all long-term capital gains on all assets will be at 12.5 percent without indexation. The holding period will be one year for all listed assets and two years for all other assets. This simplified system will, in the long run, be very beneficial for taxpayers." (ANI)