Capital gains tax

I wrote a piece in yesterday’s Financial Express about the budget proposal related to capital gains taxation and securities transaction tax. I wrote that the government seems to have realized that its decision two years ago to replace the capital gains tax on securities with a tax on securities transactions was a mistake. My article makes the following points:

• The capital gains tax is like a call option on the stock market index. If the market rises and people earn capital gains, the government gets a share of that gain. When the market goes down, the government does not share the loss, it only allows the loss to be carried forward.
• Call options are too precious to be just thrown away but back in 2004 when “prices of securities were much lower” as the Finance Minister points out now, the call option must have looked less valuable. Now, the Finance Minister wants to bring back capital gains tax in two different ways.
• The really imaginative solution is to exploit the Minimum Alternative Tax (MAT) to achieve a tax rate of 10% without indexation which is the same as what foreign investors pay.
• The cruder solution is to raise the securities transaction tax “with a view to raise additional resources and also plug the leakage of tax revenue”. In other words, at last the government admits that the substitution of capital gains tax with the STT is leading to a leakage of revenues.

Posted at 2:19 pm IST on Thu, 2 Mar 2006         permanent link

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