In the years since 2014, the Modi government has embarked on a journey of deconstruction, weaving a grand tapestry of taxation and investment policies intended to simplify and streamline. Yet, beneath this ambitious facade lies a web so complex that it ensnares investors in a relentless grip of bewilderment and frustration. Imagine a vast labyrinth, where every turn seems promising but leads to deeper confusion. The government’s lofty ideals of clarity and transparency have instead birthed an intricate maze, a Pandora’s box of fiscal enigmas that weigh heavily on the shoulders of those daring to navigate its depths.
Investors, like weary travellers lost in an ever-shifting desert, find themselves struggling to decipher the shifting sands of policy, their confidence eroded by the capricious winds of change. This tumultuous landscape, far from fostering a nurturing environment, has become a theatre of economic uncertainty and anxiety, casting long shadows over the promises of prosperity and growth.
The year 2004 witnessed the birth of the Securities Transaction Tax (STT), a beacon of simplicity meant to replace the long-term capital gains (LTCG) tax on equities. This heralded a new era, promising to nurture investments by untangling the complexities of long-term commitments. Yet, the reintroduction of the LTCG tax in 2018, imposing a 10% levy on gains surpassing Rs 1 lakh sans the balm of indexation, marked a sudden and stark reversal. Investors, once cradled in a favourable tax haven, now find themselves besieged by the twin spectres of STT and LTCG tax.
Envision a weary traveler, once required to pay a solitary toll for a smooth voyage, now compelled to pay an additional toll midway, effectively doubling the cost for the same distance. This mirrors the plight of Indian investors, ensnared by the dual burden of both, STT and LTCG. The recent escalation of the LTCG tax rate from 10% to 12.5% further exacerbates this dilemma, unveiling a tapestry of inconsistency that gnaws at investor confidence.
Investor sentiment, much like the gentle breath sustaining a thriving ecosystem, is vital to a robust stock market and, by extension, a flourishing economy. The ceaseless oscillations in capital gains taxation cast an aura of uncertainty, akin to erratic weather patterns that devastate crops. Just as farmers yearn for a stable climate to nurture their fields, investors crave a predictable and equitable tax
regime to cultivate their portfolios. These erratic policy shifts deter the long-term investments essential for market stability and economic vitality, particularly impacting retail investors who infuse the market with much-needed liquidity.
Also read: Budget 2024: Real Estate Investors Face Higher Tax Burden as Indexation Benefits Removed
A regressive stride is found in the removal of indexation benefits for long-term capital gains on assets such as property and gold. Indexation, which adjusts an asset’s purchase price for inflation, ensures that investors are taxed solely on real gains. Stripping away this benefit is akin to informing a marathoner that the finish line has been moved further, without prior notice. The effort remains unaltered, but the reward diminishes, unjustly inflating the tax burden on long-term investments and eroding the bedrock principles of fair taxation.
Capital gains taxation: A meandering and inconsistent approach
Venturing into foreign securities can lead investors into the tangled web of double taxation, where they find themselves taxed both in India and in the country where the investment is held. This dual imposition not only complicates tax filing but also significantly inflates the overall tax burden. Unless relief is claimed under Section 91 of the Income Tax Act, investors face the daunting task of navigating complex international tax treaties and compliance requirements, further exacerbating their financial and administrative burdens. This issue underscores the need for clearer, more harmonised tax policies to mitigate the impact on global investors.
The labyrinthine nature of capital gains tax calculation extends beyond mere arithmetic. Investors must meticulously maintain records of acquisition costs, improvement expenses, and various transaction-related expenditures. The removal of indexation benefits adds another layer of complexity, as does the need to comply with ever-evolving tax provisions. The administrative and compliance burdens weigh heavily on investors, demanding rigorous documentation to accurately compute gains and claim any applicable tax benefits. This meticulous record-keeping and compliance effort can deter potential investors, further stifling market participation and economic growth.
The need of the hour is a slab-based system for capital gains tax, aligned with income tax brackets, paving the way for greater equity. Just as a modest shopkeeper and a colossal company should not be taxed identically on their profits, small investors should not shoulder the same tax burden as vast institutional entities. A progressive tax structure would more fairly distribute the tax load, fostering broader participation from small investors and nurturing a more inclusive investment environment.
Current tax policies cast shadows not only over individual investors but across the broader economic landscape. Diminished equity market participation can stymie market liquidity and throttle economic growth. It is akin to a sports team bereft of its star players; the overall performance falters. Likewise, a market deprived of robust retail investor involvement struggles to sustain its momentum and growth trajectory.
The finance ministry’s approach to capital gains taxation has often meandered, lacking consistency and foresight, engendering a fragmented and onerous tax milieu. The dual tax burden, the expunging of indexation benefits, and the absence of a slab-based tax system are pressing areas in need of redress. For India to kindle a vibrant investment climate, it requires tax policies that are consistent, just, and foreseeable, nurturing sustained investment and economic prosperity.
The Union budget 2024-25 has dramatically overhauled the capital gains tax landscape, unveiling measures poised to profoundly impact investors. The eradication of the indexation benefit from the capital gains tax framework, paired with a reduction in the LTCG tax rate from 20% to 12.5%, will bear varied repercussions for property owners and gold buyers. The Budget has also expanded the tax exemption threshold on equity gains while rectifying prior inconsistencies in the taxation of certain non-equity funds.
Yet, the removal of the indexation benefit could escalate tax liabilities for some property sellers. For instance, a property bought for Rs 25 lakh in 2003 and sold for Rs 1.5 crore today would face higher taxes due to the removal of indexation benefits, increasing liabilities from Rs 12.71 lakh to Rs 15.62 lakh.
Conversely, a property acquired for Rs 75 lakh in 2018 and sold for Rs 1.5 crore today would incur a lower tax of Rs 9.37 lakh under the proposed rules, compared to Rs 10.55 lakh under the current system. This disparity highlights the varied impact of the new landscape, contingent on the holding period and accrued gains.
The Budget also proposes elevating the tax on short-term and long-term gains from equities, dissuading speculative activity, and promoting longer-term holdings. This rationalisation of the capital gains tax regime brings parity across asset classes, leveling the investment playing field.
To cultivate a stable and predictable investment environment, the government’s tax policies warrant
reevaluation. Investors, as stewards of India’s economic future, must champion changes that simplify the tax framework, fostering sustained investment and economic vitality. Only through consistent, fair, and transparent tax policies can India aspire to achieve robust economic growth and a thriving investment ecosystem.
Dharminder Singh Kaleka is a development policy specialist based in London.
