Indian Markets React Sharply to New Tax Regime on Equity Shares

Investors have not taken the Indian Government’s move to impose a 10 percent Long Term Capital Gains tax on gains exceeding 100,000 Indian rupees (USD 1,558) on equity shares as of 1 April 2018 lightly, with the aftershock of the announcement in the 2018-19 (Apr-Mar) union budget felt by all.

By Kumar. S

Around 82 billion USD of wealth was eroded within three trading days since the tax change announcement on 5 February 2018. The BSE (Bombay Stock Exchange) fell by 1291.83 points which was a 3.6% fall from the 31 January close.

The long-term capital gains tax will come into effect from 1 April 2018. This year’s budget 2018-19 (April-March) has reintroduced the provision of taxing long term capital gains after almost a decade and a half.

The plummeting in stock prices is not without reason and has more to do with immediate market sentiment, with the announcement contributing to its move south.

Equities have offered a high return on investments and have been a top draw among all asset classes. What made them more lucrative was the fact that there was no tax on the sale of stocks beyond a year of purchase. Till now, there was a short term capital gains tax levied on the profits made from the sale of shares within a year of purchase.

The government has also not indexed the equity stocks against inflation which has negated its advantage over debt funds which have a higher long term capital gains tax at 20 percent, but are inflation indexed, something that has irked the investors more.

Trade pundits believe that the volatility in market is likely to continue till the dust settles in, which may herald behavioural changes among investors...

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