Capital gains taxation reform

This blog has been a consistent advocate of higher capital gains taxes. See this, this, and this. 

For a start, India's capital gains taxation regime is needlessly complicated. It has 12, 24, and 36 months as the minimum holding period for shares, real estate, and debt to become eligible for long-term capital gains  (LTCG) tax. Short-term capital gains (STCG) are charged at the normal slab rates of the tax payer, though the gains from sales of shares, equity mutual funds, or units of a business trust, are charged at 15%. Long-term capital gains is taxed at 10%. The full range of categories and rates is below.

In addition, investors can adjust profits and losses on different investments against each other or against profits/losses in the future.

This complexity, a legacy of the gradual and ad-hoc emergence of policies, creates several distortions.

1. It creates opportunities of arbitrage across instruments. To the extent that investors seek to minimise their tax returns, it encourages investments to prioritise those attractive instruments. 

2. This arbitrage ends up going against public policy objectives. For example, the longer holding period and higher rates on debt mutual funds compared to equity funds, attracts investors into speculative equity markets over stabler debt markets. 

3. The flat rate structure also means that the tax system does not discriminate between small and high net worth investors. Given that only a small proportion of the population invest in these assets, and such investments attract much lower rates than regular income, it's natural that the capital gains structure is a source of widening inequality and also generates strong opposition to any change.

A recent article in Business Standard pointed to the fact that those who declared more than Rs 1 Cr annually from LTCG was 8629, with Rs 40,000 Cr income for 2017-18. I imagine it would have doubled in these boom times by 2021-22.

The LTCG rates for India is much lower than those for most of its EM peers. 

The time has come to wind up the adhoc regime and generous benefits to formulate a comprehensive capital gains taxation regime for India. 

Update 1 (15.01.2023)

As Union Budget 2023-24 nears, The Ken has an article on India's complex capital gains taxation system.  

Capital gains vary across asset categories based on tenure of holding, indexation, exemptions, and tax rates.