A Call for Balance in Capital Gains Taxation
Finance Minister Nirmala Sitharaman has said that she is willing to hold discussions with investors to bring down the taxes on long-term and short-term capital gains. While it is great that the Finance Minister is willing to speak with the Equity investors (as they are taxed very less in most of the geographies and it would also be great if she can also hold discussions with other categories of investors.
The Importance of Capital Infusion
Understanding the tax implications of the capital that is infused in a company to grow is very important. Since the capital that is infused in a company to enhance its productivity is ‘risk capital’, some preferential treatment is warranted. The issue, however, is how much of a treatment is warranted.
Currently, gains on long-term equity are subject to a tax rate of 12.5%. Short-term capital gains on equities are taxed at a rate of 15% (after applicable Securities Transaction Tax or STT). However, gains on capital (debt) are taxed at the normal tax rate of an individual, which can even be higher than 30% after including cesses and surcharges that are mandatory.
The Case for Equity as “Risk Capital”
Investing in equities as ‘Risk Capital’ and thus deserving of even lower tax rates has its supporters. But then so too is Debt ‘Risk Capital’. Bank fixed deposits for instance are considered to be ‘risk free’. The Deposit Insurance and Credit Guarantee Corporation (DICC) covers all deposits including those in co-operative banks up to the extent of Rs 5 lakh each. Any amount in excess of this is the investor’s risk that he is taking on by lending his capital to the bank. Interest rates on loans can decline sharply in a falling interest rate scenario and cause the value of the investor’s holding to decline sharply.
First, risk of loss in debt also is just as big, if not bigger, than risk of loss in equity. There is a general perception that risk in Bank’s Fixed Deposits is zero. But that is not true. Risk in such deposit does cease to exist after Deposit Insurance and Credit Guarantee Corporation cover of Rs 5 Lacs is reached but it does not cease to exist. In extreme situation of Bank going insolvent, it is in interest of Government to stop such deposits from being looted by Bank. Therefore, even very safe to return (in interest) debt should be offered some tax concessions.
On the other hand, debt is not of only one kind. MFs and Corporate Bonds for instance are a lot safer than Equities. An investor can suffer losses only if he has invested his money at wrong interest rates. Thus while monitoring interest rates in the market is essential for an investor in debt, for an investor in Equities also it is. And therefore it would be only fair if Equities too are given some tax benefits as are granted to other kinds of ‘risk capital’-as debt also is.
Understanding Risk from Different Perspectives
Delusion is a serious issue. A person could put all their money into stocks believing there is a system to win in the long run, without realizing that there’s a real risk of losing all their capital. In reality, the risk to capital with stocks is higher than with debt or bank fixed deposits. There’s a greater risk of capital losing value or even dropping to zero. This risk to capital is far greater with stocks than with other types of investments. As such, one has to be very careful. One has to realize the potential risks of such an investment and be prepared to face the consequences of losing some or all of the money invested.
One of the most fundamental errors that investors, including billionaires, make is to view risk solely in terms of loss of investment. To them, a large loss in their portfolio is bad for them but will have little to no effect on their wealth. However, for wage earners, even a small loss of capital can have an enormous impact on their lives and create “existential risk” for them and their families. Thus, it is essential to consider all perspectives when assessing risk.
Equity investments involve high risk of total loss of investment. However, such risk is known to the investor and he invests only what he can afford to lose. The responsibility of losses thus squarely rests on the investor. There is no case for the government to grant overly favorable tax treatments to such investors.
A Reconsideration of Investor Tax Benefits
The way to view the risk in relation to the taxation of returns from capital should always be from the perspective of all investors and not of the investors in equities. Since the equity investments have higher risk and higher returns, the lower risk investors should get more tax benefits. Thus there would be fair taxation and not skewed in favor of certain group of investors.
The stock market today is very volatile. Therefore, returns on investments in equities are very high and even higher than those that an investor can earn from investments in debt. It would therefore be proper for the government not to give preferential treatment to the tax on capital gains solely to equity investors and that it should also be fair to all other investors as well as the overall fiscal policy of the government.
Tax Concept is a dedicated team of financial writers, legal analysts, and tax professionals committed to breaking down complex Indian corporate updates. From real-time GST amendments and crucial Income Tax judgements to EPFO schemes and corporate law updates, TaxConcept serves as a reliable, authoritative guide for chartered accountants, businesses, and everyday taxpayers seeking absolute compliance clarity.