Last year ahead of the Union Budget 2017 there was plenty of speculation that long term capital gains on shares was likely in the Budget. This time the speculation is back, but, here are some reasons why it could happen in 2018.
Markets are trading at record highs
The Sensex has closed 2017 at a new record high of 34,056 points. It is not a bad idea to cool the markets a little, so valuations become more realistic. In fact, the Sensex is now trading at trailing p/e of 25 times, which is way higher than the average of 17 times.
It would be a good idea to introduce long term capital gains on shares to boost revenue and pull down elevated multiples. One would understand if sentiments for the markets were poor and the same was introduced, but, this time it is more buoyant.
Fiscal deficit soaring
The fiscal deficit for the full year has already crossed the target limit of 3.2 per cent. It is likely that the deficit would reach 3.7 per cent, if economists and analysts are to be believed. The 2018 Union Budget would be the last full-fledged Budget before the elections.
It is likely that the government would increase spending, which means it needs to boost revenues. Against this backdrop, it will not be a surprise to see the government levy long term capital gains on shares.
How are capital gains on shares taxed?
In India, for other asset classes short term is defined as a holding period of three years, while for shares it is defined as only one year.
Thus, there has always been some bias towards shares. In fact, other asset classes attract both long-term and short-term capital gains tax, while shares do not attract long term capital gains tax.
If you buy and sell shares at a profit through the exchanges, after one year, you do not have to pay any tax on shares. On the other hand, if you buy and sell shares at a profit before one year, you pay a tax of 15 per cent. There is no long term capital gains on shares at the moment and it would not be a surprise if the same is introduced.