The government is looking to reintroduce long-term capital gains tax on listed stocks with certain riders as part of its attempts to raise more revenue in the Budget. Sources said the view in the government is that the tax, along with withdrawal of securities transaction tax (STT) introduced 14 years ago, was prudent after the Narendra Modi administration managed to successfully renegotiate tax treaties with Mauritius and Singapore, which allowed investors to get away without paying taxes anywhe ..

Currently, trades on stock exchanges face STT irrespective of duration of the holding. If finance minister Arun Jaitley opts to reintroduce long-term capital gains tax, the government will be able to levy tax on shares that are held for more than 12 months too.

There is of course a demand to increase the holding period to two-to-three years as consultants argue that one year is hardly long-term. In case of property, the period was reduced from three years to two years. Market players are obviously not happy with the proposal and they believe that the government will tax them when valuations are high and will impact stock markets and fundraising as well as disinvestment plans.

"There are arguments for and against it, but on balance, I am not sure whether there are good reasons to change the regime at this point of time. There is an element of stability, predictably and continuity. For years, STT has been justified on the grounds of simplicity and ease, and that one pays irrespective of whether you buy or sell or whether there are gains or losses," said Pranav Sayta, partner at consulting firm EY.

The argument, however, does not find favour with a powerful section at the Centre, which believes that the setback will be temporary.

There is a view that the tax should come with riders that apply to only new transactions above a certain value and the levy could be around 10%. The government will also need to take a call on whether scope of the tax will include mutual funds, which have become a crucial investment tool for the middle class and has emerged as a strong counter to FIIs. Some in the government believe that the reintroduction of the tax will help Jaitley raise resources to meet his other spending requirements, including tax concessions for the middle class.

"The expectation is that the time limit for long term capital gains may kick in after 24 months. Resultantly, many investors divesting within 24 months shall have short term capital gains (STCG) and shall be liable for tax at 15% in addition to STT. If STT rates are changed moderately, then the overall tax collection may be reasonably good. The other option is to drop STT completely. Then, long-term capital gains and STCG collection may give additional contribution to government treasury," said Hemal Mehta, partner at consulting firm Deloitte Haskins & Sells.