FM MUST MITIGATE STCG TAX PAIN OF SMALL TAXPAYERS

Jigar M. Patel
International Tax Attorney

After the intial sneeze on the budget day in reaction to the rise in capital gains tax, Indian capital market seems to have taken the tax pinch in the stride. “Look at the fundamentals driving the market and the resultant gains, why complain on taxes,” say market experts.

Memorandum explaining the provisions of the Finance Bill has attempted to defend the hike in tax on short term capital gains (STCG) on equity from 15% to 20% by observing that, “the present rate of 15% is too low and the benefit from such low rate is flowing largely to high net worth individuals (HNIs). No doubt it is true that HNIs in the higher income slabs of Rs. 50 lakhs or more, attracting tax at the effective rates of 34% to 39% (with surcharge), may not have any reason to complain against the 20% levy. However, let us take a sight at the plight of this tax burden on equity gains in the case of a small taxpayer in the income bracket of Rs. 15 lakhs or below.

Historical Insight into Equity Gains Taxation

It needs to be recalled that it was in 2004 that a historic reform in the taxing of equity market gains came to be introduced with the introduction of the Securities Transaction Tax (STT) and the simultaneous abolition of the tax on LTCG from securities and scaling down of tax rate on STCG from securities to 10%. It was in 2009 that the STCG tax rate on equity gains came to be raised to 15%, which has effectively continued upto July, 22, 2024.

The STCG tax rate of 10% or 15% on equity gains has always been perceived to be a concessional tax rate aimed at encouraging an investor to participate in the equity market. Therefore, this rate has compared favourably to the tax rates on normal income, for all class of taxpayers, small or big. A look at the Chart alongwith, presenting a historical perspective and comparing the tax rate on equity STCG with normal tax rates, proves the point.

20% Tax on Equity STCG – Harsh & Iniquitous for Small Taxpayers

When normal tax rates have slided down to 15% in income-slabs upto Rs. 12 lakhs, the flat 20% tax encounter on short term equity gains for the small and common taxpayers would prove to be nightmarish. While the FM is justified in seeking larger share in the pie from HNIs, she certainly does not wish that the smaller investors shy away from reaping short term market gains! The annexed Chart highlighting the impact analysis of the proposed tax burden on STCG taxable u/s. 111A in comparison to the regular tax if these gains were to be taxed as normal STCG will adequately prove the point.

Taxpayers may Click Tax Saving with this Smart Tax Trick!

To illustrate, if the entire total income of Rs. 15 lakhs of a taxpayer is represented by equity STCG, tax u/s. 111A on total income would now work out to Rs. 2,40,000 in comparison to tax at normal rates of Rs.1,40,000. No doubt, in this case, with some smart thinking out of the box, a healthy tax saving of Rs.1 lakh can still be lawfully reaped, by opting for transfer of shares via off-market transactions.

However, would the FM want to lose STT in such cases or think of the more pragmatic option of offering a concessional tax rate on equity STCG for taxpayers in the total income range of upto Rs.15 lakhs, thereby bringing cheer for small taxpayer-investors?