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Union Budget 2020: Should LTCG Tax Be Abolished?

IndianMoney.com Research Team | Posted On Thursday, January 30,2020, 04:08 PM

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Union Budget 2020: Should LTCG Tax Be Abolished?

 

 

Take a look at this shocking statistic. More than 3 Lakh investors dealing in listed equity shares and mutual funds have evaded long term capital gains tax. The Tax Department has taken a serious note of this and recommended that the Government not abolish LTCG tax.

From April 1st 2018 the sale of equity-oriented funds and shares attract a 10% LTCG tax (plus cess) if long term capital gains are more than Rs 1 Lakh.

Take a look at another fact. Around 2.5 Lakh investors (This is 44% of individuals who sold shares and mutual fund units) either reported zero or substantially lower values in their ITR. This is in spite of transactions adding up to Rs 4 Lakh Crores.

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Union Budget 2020: Should LTCG be abolished?

Why the Tax Department Doesn’t Want LTCG on Equity to be Abolished?

This is one of the few ways to track people who have evaded taxes. If they have huge money to invest in equity, how is that they are not paying taxes? Penny stocks are used to launder black money and can be tracked through the LTCG tax route.

LTCG tax is a standard across the World. It is levied by countries like US, Canada, Australia and China. Tax ranges from 10-30% on profits earned on shares and mutual fund units. So, this demand of withdrawing LTCG on equity funds doesn’t hold ground.

See Also: What to Expect From Union Budget 2020?

Case for Abolishing LTCG

It’s an excellent idea to completely remove the LTCG tax. It’s great if savings can be exempted from taxation at the time of investment and made exempt even when it grows. Only income withdrawn is taxed. If the monetized savings are reinvested in an asset, the savings too must qualify for the tax exemption. Only that portion of gain which is not reinvested in an asset is taxed at the applicable marginal rate. Why not abolish both short-term and long-term capital gains?

This could encourage healthy participation in the stock markets. Stock investors would reduce churning as there is no short term and long term capital gains to fear. The basis is simple. If gains are reinvested, they must not be taxed.  

See Also: Union Budget 2019-2020: Major Takeaways

Why Abolish LTCG Tax on Equity Funds?

Abolishing long term capital gains boosts household savings. This encourages more people to invest in financial assets, instead of physical assets.

Equity investments are rising and more people would be encouraged to take up equity, if LTCG Tax is abolished. After demonetization a lot of money flowed into equity. After LTCG tax in 2018, this flow has greatly reduced. The Government can abolish LTCG tax on equity funds to bring back the stock markets to its boom period.

The Government won’t abolish LTCG Tax on equity funds because:

  • Around 50% of the equity investors do not report or under-report long term capital gains from equity funds.
  • Abolishing LTCG encourages tax avoidance.
  • LTCG tax catches investors who otherwise would have escaped unnoticed, if they don’t pay income taxes.

See Also: Will Middle Income Salaried Class Benefit From Union Budget 2020?

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