LONG TERM CAPITAL GAINS TAX
ON SHARE TRANSACTIONS
There is a proposal doing the rounds for Taxing long term capital gains in equity share transactions. This was always Exempt in India, for all these decades, for very valid reasons. But, periodically, some one or other makes this hasty, ill-conceived proposal, without considering its far reaching implications for the country"s development. Of course, so far, Governments acted wisely and shelved such proposals.Will it do this, this time also, or, fall for the evil temptation of prioritizing taxation before overall development?
What is the penetration of Equity Habit in India? This is the first thing that we need to know.
Only less than 2% of Indians participate in any kind of equity transactions in India - says one study by Value Research. Only 18 million people participate in equity transactions of any kind - says another study (by business today). Majority of states have very few stock market investors - says another study by Live Mint.
The study says - "Maharashtra alone accounts for more than one-fifth of India’s stock
market investors. Gujarat, Tamil Nadu, West Bengal and Uttar Pradesh are
the other top five states in terms of percentage share in total stock
market investors. These five states account for a little less than 60%
of India’s stock market investors. Most of India’s states and union
territories have a smaller share in total number of stock market
investors than their share in population."
Even these numbers are likely to be overestimates as many people hold more than one demat account - says the study. Thus, the penetration of the equity investing habit is still a rarity in MOST PARTS OF INDIA and needs to be actually promoted and incentivized vigorously by the country.
Would you like to promote the habit or kill the Habit - is the question the Government, especially the Finance Minister must ask himself before considering such hasty ill-advised proposals.
Of this less than 2%, over half are F&O traders who care only for price fall and price rise and give two hoots to the development of the underlying company. This is pure speculation based on technical factors and has nothing to do with the fundamental factors governing the development of the country. Their income is speculative income and they are taxed fully even now and rightly so.
Another 25% to 35% are short term investors who buy, register in their names and dispose off in a short time of less than one year. They too look at price factor only mainly for buying and selling and care nothing much about the underlying companies' health.
Only a Small proportion of stock market participants real care for the long term health of the companies they invest in. They analyze the companies, the managements, their quarterly, half yearly and annual performance, their future plans and flaws in them, if any and so many other factors impinging on their long term health.
Many of this third category write about the companies in web sites, Journals, and so on and participate in General body meetings etc. They hold the Company Managements to account in AGMs etc for all the flaws in the company's working.
It is not the Auditors who care for the growth of the company but its long term Investors.In many wise countries, including India so far, these are exempt from taxation, in order to promote long term equity cult among the citizens which is crucial for the country's development.
EQUITY INVESTMENT IN INDIA :
As earlier said, the number of Long term investors in India is very very limited right now and is slowly increasing, thanks to the transparency introduced through NSE and its wholly computerized operations. BSE followed much later. All other stock exchanges which did not change their old, anti-investor ways completely closed down. This itself was a sad commentary on how badly they were functioning earlier.
If faster development of our country is our Government's Main concern, and if more and more companies must be promoted in all states, the equity investment habit among people of all states must be promoted vigorously and actively by the Government.
Otherwise, how do you expect companies to come up in ALL STATES?
LTCG TAX is one way of scaring away all potential Equity investors in all states from the equity investing Habit.
In my view, various promotional measures are required to promote equity habit, especially, in all underdeveloped states. For instance, a reasonable share of public issues of companies starting in underdeveloped states may be reserved for people of those states. Many such things are possible. Governments, both central and state, are only talking of development but doing the opposite to kill the equity cult among people. So, most states remain under developed.
Proposals like LTCG TAX actually scare away prospective investors in stock market. In my view, India does not need any further taxes. It just needs efficient management of the economy. When, Economy grows, more revenues will automatically result to the Exchequer.
But, why did GST revenues come down? When Government reduces the GST drastically on all items without considering their impact on revenues, as a populist measure, why will revenues not fall down?
There was need to tell the public and Tax payers and convince them - that GST was already far less than earlier (abolished) taxes. Some GST rationalisation was of course needed. But, not whole sale downward revision - to satisfy all people - even when the GST was already LOWER THAN pre-existing tax rates.
But, All GST rates were indiscriminately reduced to Neutralize Congress and its cohorts. So, GST revenues fell to some extent. It cannot be undone.
Now, proper enforcement and compliance by all tax payers is all that is needed to boost GST revenues. It will happen any way. Governments, Central and state, must focus on GST compliance now. As simple as that. No New taxes are needed. GST Revenues will grow from now on, by efficient tax compliance.
Equity investment - prior to NSE :
The existing Equity investors have a long, harrowing history to tell on the functioning of the stock market before NSE came on the scene. Many people have lost very heavily in the stock market due to the various ills prevailing in the most inefficient and dishonest stock market-broker system in those days.
The popular saying was - 1.The company makes money. 2.The broker makes money. 2.The investor loses all the money. Of the three participants, Two gain and one loses. So, it is OK. Is it not. It was a cruel joke but was a fact in many cases.
You will find that most people who made great money in those days are BROKER-INVESTORS (brokers who were also investors) and not pure investors. Yes. Most successful Investors of those days were brokers-cum-investors. Pure Investors who made money were definitely very rare in those days.
The advent of NSE only changed this position to a great extent.NSE introduced a totally computerized and extremely transparent trading and investing system in which the direct equity investor almost directly trades/invest on NSE/BSE (though through broker's system) and seals his trades/investments almost directly on the NSE's system. This has drsastically reduced most of the Broker related hassles and manual trading related hassles.
After this transparent system was introduced, other than NSE and BSE no other Stock exchange survived. They were either totally reluctant to change or very slow to change. Any way, Investors found a great relief in trading/investing on NSE. Even now, more reforms are needed in streamlining the operations at Brokers' ends and making them more efficient and more transparent. Intensive studies by SEBI are required on this aspect.
LONG TERM EQUITY INVESTORS :
Long term holders of Equity are the real owners of the company and
the company's income is their own deemed income. The company's assets are their own.
This company income, which is their deemed income is already taxed as
Corporate tax at the highest rate.Dividends paid out of the income of the company
is again taxed at source. So already the income of these long term owners of the company is taxed twice.
Now taxing long term capital gains is taxing him thrice and killing the golden goose.
We will be tempting everybody to become short term players in the market which is suicidal for the market and for the corporates.
Now who will attend General body meetings, who will criticise company performances, who will hold managements to account if everybody is tempted to become short term players by this foolish proposal?
I make long term capital gains. You want to tax me. I make long term capital losses. Will you subsidise me and pay me similar amount? Government cannot act in a one sided way. At any time, for every 100 people who make gains, there are 100 make losses also. Be fair to both of them. If you tax the former, compensate the latter. Please do not kill the golden goose with such foolish proposals.Not only that, when I am making long term capital gains on company X, there may be company Y and Z sitting in my portfolio with huge losses also. Who will compensate me for that?Long term ownership of equity capital is much unlike F&O speculative trading an short term capital gains of less than one year. It is loaded with much responsibility.It is loaded with much responsibility for the health of the underlying Corporate. When the company gets into trouble, all else will be safe. It is the long term owner who bears the burnt. When a company like reliance communications from Rs.154 to Rs.15, who do you think loses heavily? It is the long term investors.When Ajanta Pharma crashed from Rs.2000 to Rs.1100, most Long term investors (including me) were still holding to the compsny's equity - unlike the speculators and the short term sellers.They infuse stability into the functioning of every corporate.
Let the concept of ownership and feeling of ownership not die due to this foolish proposal of tax on Long term capital gains.
Tax is important. But stability and ownership of companies is far more important. Companies are stable not because of Auditors but because of the watchfulness of long term equity holders. Government must not stifle that concept.
I heard, BSE chairman made such a proposal. Did he every consult any companies before that? I heard Porinju Veliyath favoured it. He should ask his PMS clients before forming his opinion. Will they agree?
I am definitely against it because it directly and adversely affects every company's functioning.
Now, the next time, Forbes forms the list of Indian Billionares, they should deduct the LTCG tax from the net wealth before including their wealth in the list. If it is 15%, 15% goes from their wealth, whenever they they want to sell their stake. It is an atrocious tax.
All readers must express their severe and serious opposition before FM considers this proposal.
There are already many proposals affecting employment in the country and incomes of vulnerable people like senior citizens.
(a) Bank Mergers : There are proposals for Bank mergers which reduce employment drastically in the country. But, the reality is - we need to create huge employment avenues right now. Unemployment is increasing in the country at an alarming rate. Such proposals should be postponed till we create employment for the crores of unemployed in the country.
Think of the common man of the country before government makes its proposals. This is Gandhiji's Good Governance.
(b) BANK FIXED DEPOSIT INTEREST RATES :-In recent years, interest on fixed deposits has been sliding down very fast every year. We all know that.This has drastically reduced the money incomes of all individuals - especially the SENIOR CITIZENS who have retired from working life after 30-40 years of working life. This phenomenon of reducing incomes on FD interest has already put them under severe stress and most retired individuals are bitter about these declining incomes. They never know, if next year, their interest incomes on their FDs will come down by 1,2 or 3 percentages. And, combined with inflation, the real incomes suffer much more drastically. So, what will be their living standard - next year, they never know. There is least certainty on incomes from Bank deposits now.
Government says - it will assure a certain percentage on a certain fixed amount. Is that the way to go by the needs of senior citizens. Take even retired Government servants. What they draw as Pension + commutation of pension+ Gratuity+ provident fund+ insurance, if any is usually put by them into Fixed deposits. These are legitimate benefits which a retired Government servant (or a PSU employee) gets at the end of his 30-40 years of service - in which he was forbidden from taking up any employment and huge restrictions on stock market dabbling etc. He puts them all in the safest asset like FDs. But, now Government has rendered it as the unsafest asset on which the incomes will comes drastically every year
A life time of service and sacrifice and at the end of it - Government says, we will give you say 8% on some 10 lakhs and on balance, you will never know what you will get each year. It may come down to 1% or 0% even, as it is in some developed countries.I feel, taking care of senior citizens and poor people etc requires a far more sensitive approach, from any Finance Minister and his Government.
In the circumstances, many of them are turning to Mutual funds / direct investment in shares as an alternative route to retaining their income. Now, that route also is proposed to be taxed !! It is bad. It is unethical. It hits at the very roots of corporate functioning. All readers must bring it to the notice of the Government, the Finance Minister and the Prime Minister and ensure this unwise proposal is shelved completely.
(V.VIJAYAMOHAN)
We will be tempting everybody to become short term players in the market which is suicidal for the market and for the corporates.
Now who will attend General body meetings, who will criticise company performances, who will hold managements to account if everybody is tempted to become short term players by this foolish proposal?
I make long term capital gains. You want to tax me. I make long term capital losses. Will you subsidise me and pay me similar amount? Government cannot act in a one sided way. At any time, for every 100 people who make gains, there are 100 make losses also. Be fair to both of them. If you tax the former, compensate the latter. Please do not kill the golden goose with such foolish proposals.Not only that, when I am making long term capital gains on company X, there may be company Y and Z sitting in my portfolio with huge losses also. Who will compensate me for that?Long term ownership of equity capital is much unlike F&O speculative trading an short term capital gains of less than one year. It is loaded with much responsibility.It is loaded with much responsibility for the health of the underlying Corporate. When the company gets into trouble, all else will be safe. It is the long term owner who bears the burnt. When a company like reliance communications from Rs.154 to Rs.15, who do you think loses heavily? It is the long term investors.When Ajanta Pharma crashed from Rs.2000 to Rs.1100, most Long term investors (including me) were still holding to the compsny's equity - unlike the speculators and the short term sellers.They infuse stability into the functioning of every corporate.
Let the concept of ownership and feeling of ownership not die due to this foolish proposal of tax on Long term capital gains.
Tax is important. But stability and ownership of companies is far more important. Companies are stable not because of Auditors but because of the watchfulness of long term equity holders. Government must not stifle that concept.
I heard, BSE chairman made such a proposal. Did he every consult any companies before that? I heard Porinju Veliyath favoured it. He should ask his PMS clients before forming his opinion. Will they agree?
I am definitely against it because it directly and adversely affects every company's functioning.
Now, the next time, Forbes forms the list of Indian Billionares, they should deduct the LTCG tax from the net wealth before including their wealth in the list. If it is 15%, 15% goes from their wealth, whenever they they want to sell their stake. It is an atrocious tax.
All readers must express their severe and serious opposition before FM considers this proposal.
There are already many proposals affecting employment in the country and incomes of vulnerable people like senior citizens.
(a) Bank Mergers : There are proposals for Bank mergers which reduce employment drastically in the country. But, the reality is - we need to create huge employment avenues right now. Unemployment is increasing in the country at an alarming rate. Such proposals should be postponed till we create employment for the crores of unemployed in the country.
Think of the common man of the country before government makes its proposals. This is Gandhiji's Good Governance.
(b) BANK FIXED DEPOSIT INTEREST RATES :-In recent years, interest on fixed deposits has been sliding down very fast every year. We all know that.This has drastically reduced the money incomes of all individuals - especially the SENIOR CITIZENS who have retired from working life after 30-40 years of working life. This phenomenon of reducing incomes on FD interest has already put them under severe stress and most retired individuals are bitter about these declining incomes. They never know, if next year, their interest incomes on their FDs will come down by 1,2 or 3 percentages. And, combined with inflation, the real incomes suffer much more drastically. So, what will be their living standard - next year, they never know. There is least certainty on incomes from Bank deposits now.
Government says - it will assure a certain percentage on a certain fixed amount. Is that the way to go by the needs of senior citizens. Take even retired Government servants. What they draw as Pension + commutation of pension+ Gratuity+ provident fund+ insurance, if any is usually put by them into Fixed deposits. These are legitimate benefits which a retired Government servant (or a PSU employee) gets at the end of his 30-40 years of service - in which he was forbidden from taking up any employment and huge restrictions on stock market dabbling etc. He puts them all in the safest asset like FDs. But, now Government has rendered it as the unsafest asset on which the incomes will comes drastically every year
A life time of service and sacrifice and at the end of it - Government says, we will give you say 8% on some 10 lakhs and on balance, you will never know what you will get each year. It may come down to 1% or 0% even, as it is in some developed countries.I feel, taking care of senior citizens and poor people etc requires a far more sensitive approach, from any Finance Minister and his Government.
How
does a retired senior Citizen, who is helpless in many ways, maintain
his living standard monetarily, if Government and RBI seek to reduce his
living standard by their own initiative-by reducing FD INTEREST RATES
every year?
In the circumstances, many of them are turning to Mutual funds / direct investment in shares as an alternative route to retaining their income. Now, that route also is proposed to be taxed !! It is bad. It is unethical. It hits at the very roots of corporate functioning. All readers must bring it to the notice of the Government, the Finance Minister and the Prime Minister and ensure this unwise proposal is shelved completely.
(V.VIJAYAMOHAN)
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