No logic in keeping high equity returns outside tax net: Hasmukh Adhia

Justifying the government's decision to bring equities under the tax net by levying the Long Term Capital Gains (LTCG) tax, finance secretary Hasmukh Adhia said that there was no logic in not taxing high returns made from equities.

"It is not right to keep one class (stocks) completely out of the tax net. Equities are giving 14-15% returns every year, and so are mutual funds. If you keep reaping the benefits of 15% returns, there is no logic to keep you outside the tax net," Adhia said while speaking at the "Post Budget Analysis and GST" at Indian Institute of Management Ahmedabad (IIMA) on Sunday.

Announcing the Budget for financial year 2018-19 on February 1, finance minister Arun Jaitley imposed 10% tax on LTCG made on equities. So far, profit made on stocks held for more than one year, were not taxed, while gains made on stocks held for less than a year were categorised as short term capital gains, and taxed at 15%.

Adhia said that when bank deposits which earn 7 or 8% returns were taxed, and salaried class paid up to 30% tax, 10% tax on those making huge returns from equities, was not a huge deal. He also said that the return on equities would be very attractive even after the 10% tax.

Adhia said that LTCG exemptions in 2016-17 were to the tune of Rs3.67 lakh crore, most of it earned by corporates, limited liability partnerships, and trusts, "and very little by individuals".

The Gujarat cadre IAS officer said that companies were parking money in mutual funds to avail of the LTCG benefits, rather than investing in new projects.

"This is why we decided to impose LTCG on equities. It is 10% to begin with," he said, hinting that the rate of tax would go up in the future.

Adhia further pointed out that the government had protected the small retail investors by exempting annual earnings of Rs1 lakh from equities from LTCG.

"We have done it in a very mild way," he stressed, while denying suggestions that Friday's 840 point crash in Sensex was because of the 10% LTCG, and attributed it to global factors.

Earlier, Adhia said that the budget was prepared in the background of two major structural reforms, viz. demonetisation and Goods and Services Tax (GST), and a year before the General Elections.

"The government had a difficult choice to make, but it resisted the normal tendency to come out with a please-all budget," he said.

Talking about the higher fiscal deficit projection of 3.5% of GDP for 2018-19 in place of the original target of 3.2%, the finance secretary said that this was due to lower-than-expected tax revenues of Rs50,000 crore. He said that the government had reset its fiscal roadmap, and would bring down the fiscal deficit to 3% of the GDP by 2021.