Progressive taxation is always good for all

Dwelling at length on the securities market, Modi said, “Those who profit from financial markets must make a fair contribution to nation-building through taxes, for various reasons, the contribution of tax from those who make money on the market has been low.” 

Economic pundits have been quick to view this as a hint at bringing in tax.  Until now, investors enjoyed a generous tax slab, if they made any gains on the stock market. 

The daily average turnover of both the National Stock Exchange and the Bombay Stock Exchange is around Rs 5 lakh crore. This is from both, the derivatives and the cash (spot) markets. The government could be feeling that adequate revenue from this level of Capital market generation does not reach the government. 

There are two types of taxes, progressive and regressive. Traditionally, in other countries, indirect taxes are viewed as regressive. In India, all of us pay indirect taxes (which includes, service tax, excise, customs etc) each time we buy something. A pavement dweller who buys a matchbox or a light bulb ends up paying indirect tax. But people do not raise a hue and cry over this, because this method of collection is 

often seamless. 

Income tax, on the other hand, is progressive taxation. On the other hand, income tax often lends itself to loop holes. Until a few years ago, if one made a profit in the markets, then he/she paid income tax on it after adjusting for the losses made in markets; on the other 

hand if one made only losses, one didn’t have to pay tax and could keep carrying it forward to subsequent years for adjusting against the profits made in the markets that year. 

This led to avoidance of tax by efficient tax planning methods. Therefore, the government changed it by introducing Securities Transaction Tax (STT) in lieu of Long Term Capital Gains (LTCG) made on stock investment held for more than a year and taxed the STGC- Short Term Capital Gains, made in stock investments sold within one year period of purchase at a concessional rate of 15 %, that too after reducing the short term capital gains to the extent of short term losses incurred. 

Even if one made a killing in the stock market within a year, one was required to pay only 15 % as tax, on the basis that  playing the stock market comes with a lot of risk. The Long Term Capital Gains exemption was brought in and the tax is zero. 

As mentioned, the Security Transactions Act (STT) was brought in where the tax component is minuscule. From what Modi has hinted, it looks like the government may remove STT which is regressive because all investors have to pay this tax irrespective of whether one earn profits or not-- even when you lose, you have to pay STT – and bring back Long Term Capital Gains as it was earlier or in some other form. 

If someone is worried that there is one more round of taxation, it should be viewed in the correct perspective. In my view, if you make a profit then it makes sense to pay tax and not when you lose. 

Everyone wants corruption to end and the economy to flourish. It is morally  and ethically right to pay taxes only when you earn and not when you don’t earn-as in STT. 

In case this happens and if there is a dip in the market, it would be still good news, because one can buy shares when prices are low, as the long-term bullish story of the Indian economy is still intact.