Short-termcapital gains tax rate may rise in Budget

Higher levy on dividend searned by individualsal so on govt’sradar

The government is mulling a hike in the short-term capital gains (STCG)tax rate,and also a higher levy on dividends earned by individuals.

At present,the STCG (profits on sale of shares held for less than 12 months)tax rateis15 percent;the government is planning to increase it to 20 percent, according to sources in the know.The Centre has already started gathering feedback from key market participants.

Also, although the Finance Minister Arun Jaitley ruled out changes to the long-term capital gains(LTCG)—currently tax free—the government is toying with the idea of increasing the time frame for availing such benefits from 12 to 36 months.

The government is taking securities market regulator Securities and ExchangeBoardof India’s(Sebi’s)and stock exchanges’ views on the proposals to change the tax structure in the capital markets.Announcement regarding this could be a part of the Union Budget on February1, 2017.

On Saturday, Prime Minister Narendra Modi, at a Sebi event in Mumbai,hadsaid,“Those who profit from financial markets must make a fair contribution to nation-building through taxes.For various reasons,the contribution of tax from those who make money on the markets has been low.” He also said,“Low or zero tax rates are given to certain types of financial income.Icallup on you to think about the contribution of market participants to the exchequer.” The markets reacted negatively to it on Monday,despite Jaitley’sclarification on Sunday.

Sources said the government is considering taxing dividend income of individuals according to taxs labs applicable to them.
Currently,besides the dividend distribution tax(DDT)paid by the companies,an additional 10 percent is levied on individuals earning dividend income in excess of Rs.10 lakh annually.The move could increase the effective tax on dividends to 30 percent for those in the high-income bracket.

Market players said the taxes on dividends are already high and a further increase could impact dividends payouts.

“The DDT is already tripled -taxed,as it is paid on profit after tax by a company.If the government keeps increasing taxes on dividends,the company will insteadstarto pting for share buy-back.We have seen that play out already after the government levied an extra10 percent DDT in last year’s Budget,” said Ramesh Damani,member,BSE.

The government will first try to assess the impact of increasing this rate by five percentage points on investments, said a source.

Market players said increasing STCG would be a double wham my for investors,as they are currently paying securities transaction tax(STT) on all trades.

“I don’t think there is a need to change the design of capital gains tax.The objective behind STT was to simplify tax collection from securities,” said Sudhir Kapadia, national tax leader, EY.

He said the government can look to focus on curbing tax evasion through investments made in penny stocks by improving the surveillance standards.

Currently, the government collects aroundRs.7,400croreannuallythroughSTT.

The government has also asked stock exchanges to suggest measures to crack down on tax evasion through penny stocks. The exchanges have submitted their recommendations to the finance ministry.

The move came in the wake of increasing tax manipulation cases in the stock market.The income tax department has so far detected tax evasion worth about Rs.38,000 crore involving around 1,000 entities,in dealing with penny stocks.The amount has been arrived at through investigation of cases of stock manipulation in the past two years.

Business Standard New Delhi,27th December 2016