Post-Diwali, the Narendra Modi government is preparing a bonanza for the stock markets. The Prime Minister’s Office (PMO) and the Finance Ministry are working on several measures like abolishing dividend distribution tax (DDT). In addition, the current tax slabs and long-term capital gains (LTCG), short-term capital gains (STCG) period, securities transfer tax (STT), etc are also being reviewed.
A meeting of the Department of Economic Affairs (DEA) and the Department of Revenue was held in the Finance Ministry with representatives of the PMO. The government had brought the LTCG in again after more than a decade in the 2018 Budget, with a provision of 10% tax on funds above Rs 1 lakh. The government may review this, eliminating the tax liability after a particular holding period.
A day after that Budget, the benchmark indices had on 2 February 2018 plunged up to 1.72% in late morning trade after Fitch Ratings said weak public finances constrain India’s sovereign ratings. The Sensex had tumbled by 591.69 points or 1.64% to quote at 35,314.97 as banking, financials capital goods and many an auto stock nosedived. Also, the NSE Nifty had dipped below 10,900 to trade at 10,826.50, down by 190.40 points, or 1.72%. Widespread selling had dragged all the sectoral indices led by realty, consumer durables, power, capital goods and banking sectors, falling up to 5.17%. All the sectoral indices had ended in the red. BSE realty had plunged 6.28%, followed by infrastructure (4.03%), power (3.94%), capital goods (3.59%), auto (3.47%), consumer durables (3.37%), finance (3.23%), PSU (3.11%) and oil & gas (3.04%).
Explaining the reason behind imposition of LTCG in 2018, the government had said that exempting such income from tax was inherently biased against manufacturing and encouraged diversion of investment to financial assets
Short-term capital gains tax at the rate of 15% is levied on holding shares for a period of less than one year. Capital assets in this category include shares of listed companies, ETFs (exchange-traded funds) and equity-focused mutual funds. At the same time, STT is charged on the purchase and sale of securities including shares. The market has been demanding a reduction in STT or abolition of it.
The government had announced a 20% tax on share repurchases to address the shortcomings of DDT and this raised investor worries. Finance Minister Nirmala Sitharaman announced this new provision in the Budget proposals of this year. The idea was to clamp down on companies bringing in share repurchase offers to avoid DDT.
In the Budget, an additional 20% tax on share repurchases was proposed by listed companies. This was a major reason for the stock selling after the Budget. Due to this, the share repurchase plans of hundreds of companies were stuck and since then there has been no repurchase.