The finance ministry has been discussing a review of the long-term capital gains (LTCG) taxation regime ahead of the Union Budget 2017-18 that will be presented on February 1, in the backdrop of Prime Minister Narendra Modi’s suggestion of increasing contribution of financial market participants to the exchequer.

Sources said the review may lead to tweaking in the holding period for gains in stocks to qualify as long-term capital gains, even as the government may leave the tax rates unchanged. Currently, if an investor is holding a stock for more than 12 months, it is considered to be a long-term investment. Any long-term gains from transaction in such stocks are exempt from taxes.
Watch What Else Is making News

The holding period is likely to be increased, in line with the tweaking that was done in the case of unlisted shares in the previous year’s Budget. In the case of unlisted companies, the Budget 2016-17 has reduced the period for getting benefit of long-term capital gain regime to 2 years from 3 years.

Gains from transactions in shares held for less than 12 months are considered short-term capital gains and are subject to 15 per cent tax.

Market experts say that any plan to impose tax on LTCG would make Indian equity market unattractive to global markets, since long-term gains on stocks sold after 12 months are tax exempt in most jurisdictions.
“Based on feedback from the market participants, there is a view in the government that a rejig in the holding period would be more palatable to global and domestic investors than imposition of capital gains tax,” said a government source.

The head of a leading financial firm also said that after the finance minister’s clarification, it is unlikely that the government will impose a capital gains tax for the long term. “We expect that the government will extend the holding period of equities to qualify for LTCG tax. It is also expected that the government may impose dividend tax on dividend income of less than Rs 10 lakh,” he said.

The review of the LTCG structure is being synchronised with the implementation of the General Anti Avoidance Rules (GAAR), which kick in from April 1. This will ensure that any changes in taxation structure of capital gains apply evenly to the domestic and global investors.

The government has already amended the tax treaties with Mauritius, Cyprus and Singapore, plugging a key loophole exploited by foreign players to save payment of taxes on even short term capital gains on transaction in Indian shares.