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FM calms nerves, says no plan to tax market gains
December, 26th 2016

In a bid to calm frayed nerves of stock market players, Finance Minister Arun Jaitley on Sunday clarified the government has no intention to impose a tax on long-term capital gains from trading in shares. He went on to blame “some sections” of the media for “misinterpreting” Prime Minister Narendra Modi’s speech in Mumbai on Saturday.

Jaitley said: “The Prime Minister’s speech in Mumbai on Saturday has been misinterpreted in some sections of the media, which have started speculating this is an indirect reference to the fact that there could be long-term capital gains (tax) on securities transactions.”

He said such an interpretation was “absolutely erroneous,”, adding the “Prime Minister had made no such statement directly or indirectly... and therefore, I wish to absolutely clarify there is no occasion or opportunity for anybody to reach such a conclusion because this is not what the Prime Minister said, nor is the intention of the government as has been reported.”

Read our full coverage on Union Budget 2016

Speaking at an event on Saturday, Modi had said: “Those who profit from financial markets must make a fair contribution to nation-building through taxes. For various reasons, the contribution of tax from those who make money on the markets has been low. To some extent, it may be due to illegal activities and fraud.”

Modi further added that “to some extent, the low contribution of taxes may also be due to the structure of our tax laws. Low or zero tax rate is given to certain types of financial income. I call upon you to think about the contribution of market participants to the exchequer. We should consider methods for increasing it in a fair, efficient and transparent way.” Modi also said the government will not hesitate to take tough decisions.

The Prime Minister’s comments had led to fears that stocks are likely to come under pressure, with several market players saying earlier in the day that there could be a knee-jerk reaction, as stocks resume trading on Monday.

“There could be a negative reaction. The markets will eye clarification on the issue. Right now, there is already uncertainty in the market and the PM’s comments could add to that,” said Sandip Sabharwal, an investment advisor.

Currently, long-term capital gains (LTCG) on the sale of listed securities are exempt from taxes. LTCG are profit on sale of shares on a stock exchange platform after a holding period of one year or more. Meanwhile, short-term capital gains (STCG), profits on sale of shares held for less than 12 months, are taxed at a flat rate of 15 per cent. Besides these, all stock market transactions also attract securities transaction tax (STT) in a range between 0.017 per cent and 0.125 per cent.

“There was a fear in the market that LTCG could be introduced. You cannot be milking a sector, which is already paying decent taxes,” said Ambareesh Baliga, an independent market expert.

Deven Choksey, managing director, KR Choksey Investment Managers said the PM’s comments could be aimed at foreign investors and not domestic investors.

“A lot of foreign investors investing through participatory notes (P-notes) are making disproportionate gains and are paying zero of negligible tax. Most domestic investors are paying taxes. STT is getting collected on all transactions. STCG is taxed at 15 per cent. PM’s comments could be directed at overseas investors. However, the market will wait for clarity on the issue,” he said.

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