In 2004, when UPA government was in power, then Prime Minister Manmohan Singh scrapped LTCG (Long term capital gain) Tax. The idea was to open attractive investment avenues for the middle-class. In 2018, NDA government has decided to reintroduce LTCG into the tax structure.
LTGC is a tax levied on investors who invest in long term assets like equity, mutual funds, etc. The move to scrap out the tax was to make investment in capital assets more viable and attractive. This was because from a long time Fixed Deposit was a sole form of investments for middle classes. For them, a low rate of interest was a safer choice than taking risks.
According to a report by The Indian Express, this policy brought asset growth of mutual funds from Rs. 3.26 crore in 2007 to Rs. 21.27 crore in 2017. This means that a substantial number of people invested in mutual funds.
Now with the change in stance by the Finance Ministry, a tax of 10 per cent would be levied on capital gains (LTCG) which would accrue gains amounting to Rs 1 lakh or more for the investor, starting April 1, 2018.
Taxpayers around the country are expressing their displeasure with the financial policies in this Budget 2018. Vikram Waman Karve, an Ex-Naval officer and a vocal blogger, mentioned in a tweet that, “LTCG Tax has created tremendous negative sentiment in Stock Market and also a perception that Budget 2018 is an Anti-MiddleClass Budget. There is a feeling that BJP hasn’t handled the Economy well.”
This negative sentiment towards the budget amongst the middle classes has also to do with other policy changes in terms of standard deductions, health insurance and the likes.
Another affectee Nitin Shrotri mentioned in a tweet about the immediate impacts of the new tax. Expressing his disappointment, the auto professional tweeted, “Looking at the fall in sensex I have no courage to check my MF portfolio, @arunjaitley, Please do rethink seriously on LTCG tax.”
The tax is likely to bring down the capital market in its pursuit for increase central government’s revenue.
“I think the government wants to find more avenues to generate more revenues. Definitely, the move is disappointing. This is slightly regressive in my view, especially when investments in equity are picking up, and they should not have done it at this point in time, ” Jitendra Gohil, head of equity research with Credit Suisse Wealth Management India mentioned in an interview to Livemint.
Considering the immediate impact of the Finance Ministry’s decision, there has been slight ups and downs in the stock exchange. For the middle classes, the move may make equity a less likeable option for investments.