Comment on the important changes introduced in respect of the Long Term Capital Gains Tax (LTCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019. (UPSC IAS Mains 2018 General Studies Paper – 3)
The Union Budget of 2018-19 introduced the following two important changes:
- Long Term Capital Gains Tax (LTCGT): Reintroduction of a 10% tax on long term capital gains arising from transfer of listed equity shares.
- Dividend Distribution Tax (DDT): Introduction of a 10% tax on distributed income by equity oriented mutual fund.
The long-term capital gains tax existed until 2005 but was removed to encourage greater participation in the equity markets. Though it did have its intended effect but it also had the side-effect of business surpluses being invested in financial assets due to attractive return on investments. This benefitted corporates primarily and also created a bias against investing in manufacturing. It has also led to significant erosion in the tax base resulting in revenue loss.
Keeping in mind the points mentioned above, the decision to bring back long term capital gains tax on listed equities holds merit. Moreover, LTCG in unlisted shares are currently taxed - LTCGT on listed shares ends the advantage enjoyed by the latter, bringing them on par.
In addition, the tax on distributed income by equity oriented mutual funds will provide level playing field across growth oriented funds (where the dividend is re-invested back into stocks) and dividend distributing funds (investors receive regular income through dividends). Up until now, dividends from equity-oriented funds were tax-free and were also exempt from paying the DDT.
However, these changes should also be followed by abolishing or reducing the securities transaction tax rates (levied on all transactions made on the stock exchanges), which could lead to double taxation if continued.
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