Capital gains tax, especially on short term shares sold within 12-month period, which is currently at 15% may be trimmed in the new budget by Finance Minister Arun Jaitley, going by immense hue and cry in the market circles.
However, the silent killer may be the removal of the exemption given to shares held for more than 12 months, which is long-term capital gain for retail players in the market to avoid tax that is as high as 15% in the short term. But going by last year’s experience, this concession failed to stabilize the markets as expected and its removal is very much on the cards triggering concerns among the long-term safety net players.
The main target for the FM is the short-term FII exits that cannot be taxed due to the tax treaties. Will he bring them into the tax net with the STT or will he make it open for all players removing the 15% capital gains tax remains the major question in the budget presentation on Saturday.
In one scenario, the Finance Minister may continue the current capital gains tax regime unhindered to squeeze more taxes in view of rapidly changing numbers every three months.
In another scenario, it is envisioned to extend the 15% tax on all shares sold whether in short term or long term, thus making it even for all market players.
In the third scenario, the minister may entirely remove the capital gains tax on short term sale and allow the benefit of long-term exemption to small short-term transactions as well. This will be a sure-shot to make markets rise in short term but with little leverage to control the exiting FIIs on profit-making every three months, he will be left with no control on either domestic or foreign players.
Another view is that making Soft Securities Transactions Tax (STT) slightly higher by 1 to 2 % making all the FIIs come under the widened tax net, which is not possible under the capital gains tax due to the tax treaties.
It remains to be seen which way the finance minister will move when he presents his first full-term budget on Saturday, February 28.