Mumbai: The country’s proposal to end exemptions on capital gains tax may damp demand for stocks, according to Macquarie Group Ltd and Kotak Securities Ltd.
The government on Wednesday said it may tax all stock holding profits as part of an individual’s income, Seshadri Sen at Macquarie Group said in a note to clients on Thursday.
The current system has a 10% levy on gains if stocks are held for less than a year, while exempting holdings for a year or longer.
Broadening base: P. Chidambaram (left) and Pranab Mukherjee at a press meet after the release of direct taxes code on Wednesday. Vijay Kumar Joshi / PTI
“In our view, the code may have a moderate negative impact on the equity markets in the short run, even while promoting a higher tax-to-GDP (gross domestic product) ratio and growth,” Sanjeev Prasad at Kotak Securities said in a note to clients on Thursday.
In the biggest change to its tax laws in almost five decades, Asia’s second largest developing economy aims to reduce corporate taxes to a record low and broaden the public revenue base.
Finance Minister Pranab Mukherjee said he plans to rein in tax evasion that leaves the government reliant on only 27 million taxpayers from a population of 1.2 billion, the world’s second largest.
Mukherjee plans to lower the tax rate for companies to 25% from about 30%, and end the securities transaction tax.
Better compliance would raise more revenue to help plug the country’s budget deficit that is expected to widen to a 16-year high of 6.8% of GDP in the current year.
The new code will enable the government to override double taxation avoidance agreements, which may lead to investments by foreign institutions being subject to capital gains taxes in India, Sen said.
The new code may have material implications for life insurers as the government plans to tax withdrawals from savings instruments, Nomura Singapore Ltd said in a report.
Contributions and accruals in approved retirement plans and life insurance would continue to be exempt, while withdrawals from the savings programmes would attract new taxes, Singapore-based Srikanth Vadlamani and Mahrukh Adajania, based in Mumbai, wrote in a report. The change may make unit-linked insurance products less attractive, they said.
The insurance sector may benefit from the proposed increase in the amount of savings that will be eligible for tax exemptions to Rs3 lakh from Rs1 lakh, the analysts said.
The government has sought public comment on the proposals before they are due to be passed into law in Parliament’s winter session.
If approved, the new code will become effective on 1 April 2011.
Arush Chopra contributed to this story.