To step up the economic liberalization in second term, the Modi government plans to withdraw or tweak taxes on long-term capital gains (LTCG) on equity investment held for three years or more and may also rollback decision to add income tax surcharge on FPIs. As per a report by ET Now, the finance ministry is working on a package to capital markets which have performed poorly over last few months. The package may include some tax reforms including the removal of levy on LTCG.
“This will excite investors. A reduction in taxes at this point of time will definitely improve market sentiment,” said Nilesh Shah, MD, Kotak AMC. Shah also said that the move is indication of Modi government’s respect for the market. The LTCG tax was introduced By Arun Jaitley in Budget 2018 after its removal 14 years ago. The LTCG tax was levied at 10 percent on gains above 1 lakh in equity shares.
The government is planning to remove income tax surcharge on Foreign Portfolio Investors (FPI) which was introduced in union budget presented on 5 July by finance minister Nirmala Sitharaman. On this prospective move, Basant Maheshwari, founder of Basant Maheswari wealth said “Now suddenly, we have realised we are not orphans anymore and there is a government which is willing to hear us and hear us out well,”
The first budget of second Modi government has some regressive steps like increasing surcharge on wealthy, mandatory minority shareholder increase, and exponential increase in estimated tax collection. There was 3% increase in surcharge of individuals with income of 2-5 crore rupees , 7% increase in surcharge of individuals with income above 5 crore rupees.
The government did not increased surcharge only on super rich but the trusts were also included in this. The decision of adding surcharge on FPIs had a disastrous impact on Indian stock markets
“The government’s decision to change the tax structure with immediate effect has not gone down well with global investors. Around 40 per cent of foreign funds are operating as individuals or in the trust category. They will need to unwind their positions by selling in the market, retiring the existing products and devising new products to re-enter the market,” said Deven Choksey, managing director of K.R. Choksey Investment Managers Private Limited.
As if this was not enough, the foreign portfolio investment (FPI) in equities worth more than 10,000 crore rupees flowed out of the country. But the Modi government works on a feedback based system and carries out course correction if something falls short of expectations and it appears that a quick rollback of the decision by Modi government, in a more investor friendly move, may take place.
In last few days, finance ministers held a series of meetings with all stakeholders of Indian economy. The industrialists, representatives from distressed auto sector, people from capital markets, and the economists from right side of the political spectrum who support Modi government but were visibly angry over some socialist measures met with finance ministers and told their concerns. They also suggested the corrective measures on which government is brainstorming. So, the Modi government is expected to take more measures for bringing back the animal spirits of Indian economy.