Dalal Street was enthused by reports of the central government reviewing proposals on a review of long-term capital gains (LTGC) tax and securities transaction tax (STT). The markets jumped in trade yesterday, after Finance Minister Nirmala Sitharaman said the government was open to hearing stakeholders’ views on the issue.
The timing of the move is significant as the Sensex has turned negative after the July 2024 Budget raised the tax on long-term gains to 12.5 percent and short-term gains to 20 percent. As global markets outperform and foreign capital continues to exit their Indian holdings, many are hoping for a change in the tax regime to make domestic equities attractive once again.
One of the last, big changes in taxation related to the equity markets came during the Budget 2024 session, when FM Sitharaman hiked LTCG to 12.5 percent and short-term capital gains (STCG) tax to 20 percent.
The markets have given the highest returns during the period without LTCG, with the Sensex's compounded annual growth rate (CAGR) jumping to nearly 34 percent during 2004 to 2008, when P. Chidambaram scrapped the long-term capital gains tax in favour of introducing STT.
However, it should be taken into consideration that a slew of factors, not just the removal of STT, lead to the outperformance of the markets, including a thriving global credit cycle.