Perils of the new Direct Tax Code for long term investors

Nov 12, 2009 | Personal taxation in India | 0 comments

A new (draft) Direct Tax Code (DTC) from April 2011 has been proposed by the Hon’ble Indian Finance Minister in Aug 2009. The DTC has undergone quite favorable analysis. Sample articles like this: New tax code: Pay 10% tax on Rs 10-lakh salary, or Decoding the direct tax code.

Unfortunately, what articles like these have not brought out is the massive impact on long term investors of one simple clause which removes the distinction between Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). Currently, LTCG on equity is taxed at 0%, while STCG is taxed at 15%. After April 2011, a gain on account of transfer of equity will be taxed at personal taxation slab rates, irrespective of when it was acquired. In essence this means that the taxation of 0% on LTCG on equity is being abolished with retrospective effect!

Capital gains are voluntary, i.e. chargeable to tax when profits are booked. Imagine that you invested in equity for many years and remained invested through the vagaries of the stock market. Along comes April 2011, and any sale of these long term assets will attract a tax of upto 30%. But what will the intelligent investor do? Sell all these assets in March 2011, thus attracting no tax on the LTCG.

But since we all are intelligent investors (hic), everyone and his uncle will be getting rid of equity when 2011 comes around. My prediction: we are going to see the biggest stock market crash in history. Hang around and have fun.

PS: Whats the government thinking? Huh? Isn’t that an oxymoron? Anyway, if you think this is one irritating little clause that has been slipped in by the babus in Dilli, then please do your bit as a shining new Indian by writing a Comment on Direct Taxes Code and please do take some time to Rate the Direct Taxes Code.