Budget 2024 equity tax hikes: What drove Modi government’s decision

Prime Minister Narendra Modi has promised that his third term would be distinguished by bold decisions. This might be another example of PM Modi proving his government’s willingness to make difficult, unpopular but essential decisions.

The Union Finance Minister Nirmala Sitharaman’s plan to increase the equity taxes, especially the long-term capital gains tax (LTCG), in Budget 2024 held a lot of debate. Of course, many within the market regard it as an effort to curb too much speculation. However, such fears might be mere illusions.

Sitharaman increased the levy on equities held for less than a year to 20%, the first hike since 2008, and to 12.5% from 10% for those held longer. In addition, the securities transaction tax (STT) on stock options was raised to 0.1% and 0.02% on futures beginning in October.

During an interview to AajTak, Sitharaman categorically stated that the change to propose more LTCG was never to manage the market, but to streamline and unify the structure of the taxes raised from various forms of assets. She gave examples as; As seen when GST took the place, subsumed value-added tax (VAT) on various products.

“Why should gold, property, and stocks be regarded differently? Every asset class should get the same treatment. We conducted considerable research to verify that the rate is revenue neutral and equal across all assets. The LTCG tax was hiked solely for shares, but we doubled the capital gains exemption to Rs 1.25 lakh,” Sitharaman stated.

Taking the present market condition where there is high speculation, the increase in both STCG and STT seems quite reasonable. Finally, we noted that in January 2023 data based on SEBI, nine out of ten foreign exchange dealers operate at a loss. As mentioned earlier, in a recent survey it was found that 70% of intraday traders incurred a loss in FY23, whereas the traders below 30 years borne additional loss. Increasing the STCG tax rate to 20% from the current 15% may also lead to more long-term view on the market.

The increase of STT on futures and options it is seen as a measure that eliminates excessive speculation in the market. ‘‘The proposed raise of STT on derivatives is a right move that will help reign in speculation activity in the futures and options segments,’’ said Sunil Damania, the Chief Investment Officer at MojoPMS.

Disclaimer: Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.