Most people of the mutual fund industry are a worried about any phrase starting with the words “long term……”. Will he, will he not? Based on the prime minister’s pronouncements about the economic contribution of markets – stock markets, commodity markets et al – their utility to the real economy and the low contribution of capital market participants to the national exchequer – there is a worry that long-term capital gains on equities might be taxed. I have only one wishlist from this Budget – the powers that be must desist from taking his retrograde step.
Equity earnings which manifest in stock market performance are the most refined version of earnings that one can draw from the economy. Stock markets value profits of listed companies and as we know profits of companies flow after paying for all inputs and inflation on those inputs which may come from unorganised, unlisted, MSME units etc, after paying all indirect taxes and paying for workers emoluments and benefits.
All sources of inputs – raw material, utilities – everything is taxed at multiple levels, indirect taxes of course go to governments and workers pay tax on their earnings too. After accounting for all of this, companies make a profit and then pay tax on those profits. From these profits companies declare dividends – there is a distribution tax on those dividends and for those who earn more than Rs 10 lakh as dividend there is a further tax over and above the income tax paid distribution tax paid net dividend – which as you will gather isn’t still “net” until you pay another 10% in case you earned more than Rs 10 lakh as dividend. This impacts capital formation and incentive to be an entrepreneur or be partner of an entrepreneur as in equity owner.
Now come to people who are buying and selling equities – the ones who are not long-term investors and to whom the above logic doesn’t apply. Well, they are already paying short-term capital gains tax at 15% plus surcharge and they are paying significant amount as STT or CTT as the case may be. They anyway don’t get covered by or care for long-term capital gains – they don’t have any usually because they become long-term holders only when they are on the losing side of a trade.
So net net imposing taxes on capital gains from equity investing is taxation at multiple levels for investors; on tax paid profit generation which is what drives the markets. More importantly, it is a serious disincentive to long-term investing. If one applies tax on long-term gains as is being applied on short-term gains, we are basically being told that whether you stay long-term or short-term you will be taxed on gains – it doesn’t matter. In the best case, it will push good investors into trading mindset because it just doesn’t matter or at worst it will drive people away from equity investing.
Unlike a lot of people from the industry – I do not want any tinkering on Sec 80C or retirement plans et al. If any of that happens that’s good but I think the dramatic shift in the interest rate paradigm post demonetization and the bad vibes for real estate and gold are good enough to drive investors towards equities. Talking of comparisons in the current paradigm it’s worth noting there’s no “black” or “parallel” economy which finds it way into markets because money comes in from and goes back to official banking channels. Our industry has been digital and cashless for as long as I remember. I wish equity investing is not disincentivised by multiple levels of taxation and lack of respect for entrepreneurial spirit which is what this country needs. Our problem is not whether FPIs are buying or selling – our problem is that Indians just don’t own India’s growth.
The writer is managing director and CEO, Motilal Oswal Asset Management Co