The Indian government has made a bold move in Budget 2024, aiming to siphon off a portion of the expansion and investor gains from the capital market just as equity indices are reaching record highs. This strategic fiscal decision involves a new tax system that increases both short-term capital gains and long-term capital gains tax, alongside a hike in the securities transaction tax on derivatives.
In her Budget 2024 announcement, Finance Minister Nirmala Sitharaman declared that the long-term capital gains tax on all financial assets, including equity, would rise to 12.5% from the previous 10%. Short-term capital gains tax has been raised from 15% to 20%. Additionally, the STT on Futures & Options transactions has been increased from 0.01% to 0.02%.
Market reactions were swift and strong. Shankar Sharma, founder of GQuant Investech, expressed his astonishment in an interview with Business Today TV. He highlighted that the timing of this tax hike was surprising, especially given that the general election results were not as favorable as expected. “I just finished wiping my tears after the huge increases in capital gain taxes, both short- and long-term,” he said. Sharma noted that while there had been hopes the government might refrain from such moves, the implementation of these taxes harks back to the last major financial policy shift during the demonetization phase in 2018.
Sharma elaborated on the history of LTCG, which had been reintroduced after being non-existent for several years.
LTCG was brought back to life from being non-existent for several years (from 2007). Eleven years later, LTCG came back and STT didn’t go out. So we had two unwelcome guests.
He commented, reflecting on the burden these taxes place on investors.
The rise in STCG to 20% and LTCG to 12.5% is seen as a significant blow to the market, particularly by short-term traders and long-term investors who now face steeper taxes on their gains. The increase in STT on F&O transactions also compounds the cost of trading derivatives. Analysts predict that these tax hikes could lead to a negative reaction in the market in the short term, as investors adjust to the higher costs of trading and capital gains.
The government’s decision to raise these taxes comes at a time when the market is at high levels, potentially giving it a domestic reason to correct. Shankar Sharma pointed out that the market often seeks a cause to correct at high levels, and with these tax hikes, the government has provided such a reason on a platter. “I hope it doesn’t take it too seriously but I fear it might,” he said, expressing concerns about the immediate future of market performance.
The sentiment among market analysts is one of cautious apprehension. While the government’s move aims to increase revenue, the timing and extent of the tax hikes have raised concerns about their impact on market sentiment and investor behavior. The rise in taxes is viewed as a deterrent for both short-term traders and long-term investors, potentially leading to a decrease in market activity and liquidity.
Despite these concerns, the government appears steadfast in its decision, underscoring the need to balance fiscal policies with market dynamics. The increased tax rates are expected to generate significant revenue for the government, but the challenge will be managing the market’s reaction and maintaining investor confidence.
The reaction from the financial community has been mixed, with some praising the government’s bold approach to fiscal management, while others caution against the potential adverse effects on market sentiment. The true impact of these tax changes will unfold in the coming months as investors and traders navigate the new financial landscape shaped by Budget 2024.
