Budget 2017: Short-term capital gains tax rate may go up

Higher levy on dividends earned by individuals also on radar, reports Shrimi Choudhary.
Illustration: Dominic Xavier/Rediff.com

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 rate is 15%; the government is planning to increase it to 20%, according to sources in the know. The Centre has already started gathering feedback from key market participants.

Also, although 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 Exchange Board of 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 February 1, 2017.

On Saturday, Prime Minister Narendra Modi, at a Sebi event in Mumbai, had said, '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.'

'Low or zero tax rates are given to certain types of financial income. I call upon you to think about the contribution of market participants to the exchequer.'

The markets reacted negatively to it on Monday, despite Jaitley's clarification on Sunday.

Sources said the government is considering taxing dividend income of individuals according to tax slabs applicable to them.

Currently, besides the dividend distribution tax (DDT) paid by the companies, an additional 10% 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% 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 instead start opting for share buy-back. We have seen that play out already after the government levied an extra 10% 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 whammy 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.

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

Currently, the government collects around Rs 7,400 crore (Rs 74 billion) annually through STT.

The government has also asked stock exchanges to suggest measures to crackdown 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 (Rs 300 billion) 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.