Undoing the Blunder

The recent steps by the finance minister on rollback or I should say confusion which arose from the announcement in the budget have been undone and status quo has been restored to pre- budget policy.

In the conference one reporter asked the finance ministry regarding the tax outgo impacted after rolling back this step the answer was meagre ₹ 1400 cr. Compare that to the wealth erosion of nearly ₹ 10 lakh cr. in all these, who is accountable for this notional loss, was there any due diligence done before announcement.

The Govt of the day should realize that its mandate is not just building toilets but also creating wealth in capital markets, why you ask , because the present stock markets are not just limited to a few rich but middle income people are invested indirectly via Mutual Funds and others instruments, even the EPFO is mandated to invest in stocks to generate alpha, a healthy market is also needed for the Government to achieve its divestment goals.

One such blunder was announced last year when LTCG was announced, all it led was bleeding in the Mid and Small cap part of the markets and it distorted the investors behavior and the mindset of investing for the long term. Now there is no real sense in investing for more than a year just book profits once the targets are achieved and the cost differential between the STCG and the LTCG is a mere 5% of the profits earned.

Also the Govt took note of the problem in the capital markets when the Large caps started falling, they never bothered when the mid and small caps were in red for the past 18 months. The problem with this is the middle income investor is already in the red and now that the rich guy was starting to go in the red the govt took cognizance of the situation.

The govts strategy for tax collection is flawed, wealth in developed countries were generated on thriving capital markets, why doesn’t the govt think that creating wealth is in its interest as the wealth creation through stocks will lead to buying of premium goods by the investors and in turn lead to tax generation. Rather than applying additional LTCG at the source which is a form of indirect TDS.

Also Govt needs to understand that if foreign and local investors are to be attracted over the long term then LTCG should eventually go away, take a scenario for example if a foreign fund is investing in India for a return of 15% then it has to deduct a 1.5% on those returns on account of LTCG calculations bringing its ROI to 13.5%, it might not sound much to us but in the competitive global context these things matter and also the headache to the investor in calculating these taxes.

Bottom line is in this FY Govt might end up not collecting any LTCG taxes simply because to pay this tax the first ground rule is that the investor should be in profit over the provisioned buffer of 1 Lakh rupees and the way markets have bled in the past 18 months the future looks bleak because the STCG and LTCG loses booked by the investor can be carried forward up to a period of 8 years while filing the tax returns.