'Tax rate and stock markets are entirely two different things.'
Economic Affairs Secretary Ajay Seth on Thursday sought to dismiss the notion that the downturn in India's stock market and the exodus of foreign investors is linked to the country's long-term capital gains tax regime, and asserted that stock price movements are driven by various global factors.
"The stock market goes up and down for different reasons -- what happens in the other markets in the world, what is the interest rate in the other markets in the world. It has nothing to do with the taxation. Markets in the last two days, you would have seen, have again gone up," the secretary said.
"It depends on what is the state of the economy. In the past three years, the Indian economy has grown by 7.8 per cent on an average. Other countries will try to emulate what we are doing. Even in the current year, the growth rate is expected to be 6.5 per cent," Seth said.
"The economy is doing well so this is the strength of the economy... markets, at times, depending upon what the flows in the market are... that happens,' he averred.
The secretary was responding to a query at a press conference in Visakhapatnam on whether the long-term capital gains tax rate of 12.5 per cent for equities is to blame for the market's sharp correction and foreign portfolio investors (FPIs) developing cold feet.
"As far as tax rates are concerned, the Government of India does not take any view on differentiating between different asset classes. We say we will charge them uniformly and that is the rate rationalisation which has been done," Seth said.
"Just look at it in this manner. This is equity. In the case of debt, it is the applicable tax slab rate, it can be 10 per cent, 20 per cent or 30 per cent in the long term. If you put money in a bank for five years, if your income is low, it [the tax] will be 10 per cent, those below ₹10 lakh [of annual income] don't have to pay any tax.
"But somebody has put ₹30 lakh as income, he will have to pay tax on interest income at 30 per cent... while here [in equities], one is paying only 12.5 per cent. So the tax rate and stock markets are entirely two different things. You should not mix the two issues."
Seth's remarks come in the backdrop of a viral debate triggered by remarks made by stock market veteran Samir Arora at the recent Business Standard Manthan summit about India's long term capital gains tax levy is a bad idea for foreign investors as few other jurisdictions have such a levy.
"The largest investors in the world and in India are foreign sovereign funds, pension funds, universities, and high net worth individuals. Taxing them on their gains, especially when they have no tax set-off available in their home country, and when they face forex-related risks, is a big mistake," Arora had noted, adding this had soured sentiment.
A former star fund manager of the erstwhile Indian mutual fund business of Alliance Capital, Arora is the founder, group chief investment officer and fund manager of Helios Capital, which has an eponymous mutual fund in India since late 2023.
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