Brace for higher short-term capital gains tax, dividend income

The Union Budget 2017 is still over a month from now but the stock market is known to exhibit wild swings in the weeks before the D-day. While investors take a view about various sectors and what budget could mean for the industry, this time they need to be more worried about their own backyard if things are anything to go by.

According to a Business Standard report, the government is looking at the possibility of increasing the short-term capital gains tax or STCG on profits made on sale of shares in less than a year.

Currently, the short-term capital gains tax is fixed at 15 percent, but the BS report suggests that the rate could be increased to 20 percent during this year’s budget announcement.

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With regard to long-term capital gains tax on shares sold after 12 months which at present is nil, the government is mulling with the idea of increasing the period to 36 months i.e. an investor can enjoy tax exempiton, if shares are sold only after 3 years and not the current one year period, the BS report said.

Further, based on the tax slab, the government may even look at taxing the dividend income. Currently, companies pay dividend distribution tax, and individuals earning more than Rs 10 lakh as dividend income in an financial year are taxed at 10 percent. This tax rate may go up to 30 percent for individuals coming under high-tax bracket.

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As it is, stock market players are already dealing with securities transaction tax (STT) and any move to increase tax rate on short-term capital gains could severely dent the sentiment, caution investors.

For several years, capital market industry experts are lobbying the government to completely abolish the securities transaction tax, but the government has not paid any heed to their demand. The government collects Rs 7,400 crore as STT every year.

Recent developments indicate that government could take stern measures in next year’s budget to increase tax rate on returns made by stock market investors.

Prime Minister Narendra Modi on Saturday in a veiled threat indicated that the government may look at investors deriving huge income from stock market returns.

Calling for wider inclusion, Modi had said our markets must show that they were able to successfully raise capital for projects benefiting the vast majority of our population, particularly related to infrastructure.

“The true measure of success (of the stock markets) is in its impact in villages, not on Dalal Street or Lutyens Delhi. Sebi should work for closer link between spot markets like e-NAM and derivatives markets to benefit the farmers,” Modi urged.

A day after the PM’s statement Union Finance Minister Arun Jaitley clarified on Sunday that there is no plan to impose long-term capital gains tax on securities investments, after a statement by prime minister raised such a suspicion.

“This interpretation is absolutely erroneous. The Prime Minister has made no such statement directly or indirectly. I was present at the function in which this speech was given. I wish to absolutely clarify that there is no occasion or opportunity to anybody to reach such a conclusion because this is not what the Prime Minister said nor is it the intention of the government as has been reported in some section of the media,” he said.

For full coverage of Union Budget 2017 click here.