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Last Modified: Wed, Feb 07 2018. 09 49 AM IST

What does tax data say about long-term capital gains?

Individuals and companies account for the bulk of long-term capital gains declared, shows a ‘Mint’ analysis of income tax data

There is a direct correlation between market movement and long-term capital gains. Photo: iStockphoto
Sachin P. Mampatta

Mumbai: Many have attributed the fall in the stock market after the Union budget to the introduction of the 10% long-term capital gains tax on shares. Who exactly might be the most affected by its introduction?

An analysis of income-tax (I-T) data shows that individuals and companies declare the highest proportion of long-term capital gains. Individuals accounted for the highest proportion of long-term gains declared in two out of the four years for which income tax numbers are available. Companies come out on top for the other two years.

Companies accounted for 49.19% of long-term capital gains in the latest year available which is financial year 2014-15 (corresponding to assessment year 2015-16). Individuals accounted for 43.92% in the same year.

In terms of number, a disproportionate number of those declaring long-term capital gains are also individuals, according to income tax statistics that Mint analysed. They account for 90% of the total number of entities who mention long-term capital gains in their income tax returns. Other categories such as company, Hindu undivided family, firm, association of persons (AOP) or a body of individuals (BOI) and others account for the remaining. Less than 1% of the tax returns filed mention long-term capital gains across the years.

The caveat to this is that the data includes all kinds of long-term capital gains: transactions on property, bullion and others. The government has not released more granular data. It would be interesting to see if the trend is significantly different if one considers long-term capital gains on only listed securities. Individuals, for example, have a significant proportion of their savings in physical assets like real estate and gold.

Even if individuals have to bear a significant portion of the new capital gains tax, it is no reason why it should not be imposed in India. In fact, it has been observed that India has an especially liberal taxation policy on capital gains after long-term gains were made tax-free in the 2004 budget.

“The paper finds that capital gains tax on securities is very liberal in India... Distinction between capital gains on the basis of holding period and exemption of long-term capital gains, coupled with a low flat tax rate of 15% on short-term capital gains, is resulting in severe revenue implications for the exchequer in India,” said a May 2016 paper entitled Revisiting Capital Gains Tax on Securities in India, authored by Prashant Prakash, Jaya Kumari Pandey and Abhishek K. Chintu, published in the Economic & Political Weekly.

The paper referenced a method to calculate long-term capital gains tax (Amaresh Bagchi’s paper Rethinking Tax Treatment of Capital Gains from Securities, published in 2007). It used regulatory data about the value of delivery-based transactions during a given year to calculate the amount of long-term capital gains that might have been generated. Mint replicated this methodology using data from the Securities and Exchange Board of India’s Handbook of Statistics.

Calculations show that the government has missed out an annual average figure of over Rs32,000 crore in long-term capital gains over the last 10 years, based on a 10% tax rate. This is higher than the Rs20,000 crore mentioned in the budget speech .

The methodology does not account for the exemption on gains up to Rs1 lakh which has been made available in the latest budget due to lack of data on individual gains. Tax data was also not sufficiently granular to calculate how much of the long-term capital gains declared may have been below this threshold.

There is a direct correlation between market movement and long-term capital gains. There are peaks seen during the bull run preceding the global financial crisis. Similar gains are seen when the markets rose after the Narendra Modi government came to power. This may also mean that a crash in markets would erode collections.

The caveat to this is that the methodology considers that investors held half the delivered shares for more than a year. It also assumes that the capital gains realized on the same were not more than 50% of the final selling price. Differences in the proportion of delivered shares which have been held for more than a year, and the degree of their gains may alter the arithmetic. However, it does give an estimate which is useful until more granular data is made available.

The gains through the new tax would be important at a time the Modi government has been struggling with meeting fiscal targets. The fiscal deficit has been targeted at 3.3% of the gross domestic product (GDP) for 2018-19. This is higher than the earlier target of 3%. The new tax would help reduce the deficit by 0.1% of GDP, based on the government’s expected collection of Rs20,000 crore.

A little extra tax from the average stock market investor may not be asking for too much at such a time, though the government could consider providing indexation benefits and removal of securities transaction tax to soften the blow.

Topics: Long-term capital gainslong-term capital gains taxLTCG tax on sharestax on equitiesstock market crash

First Published: Wed, Feb 07 2018. 01 25 AM IST

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