With the advent of New Year, the Street will watch out for short-term triggers, one of which is the Union Budget, which is likely to be presented on February 1, 2017.

Among several expectations, investors and analysts believe that the government could look to address its fiscal deficit situation.

In the recent past, the market experienced jitters on the back of government’s efforts to borrow an additional Rs 50,000 crore in Gilts, raising eyebrows on the deficit target. As a result, the Street also corrected a bit, before bouncing back in the final sessions of 2017.

With such a situation, it is evident that the government will look for avenues to earn more revenues. While borrowing is one such choice, there are reports which indicate the likely introduction of long-term capital gains (LTCG) tax on equity investments, a move largely opposed by players in the stock market.

According to a report in The Hindu BusinessLine, the Union Budget in February 2018 may take up the issue of LTCG tax. Further, the report added that the government may scrap the difference between the tax on long- and short-term capital gains or raise the holding period for long-term tax exemption to three years from one.

Before proceeding with the debate around the issue, it would be prudent to understand the mechanism.

Equity shares or equity mutual funds are considered capital assets. If you hold them for more than 12 months and then sell, the gains are called long term capital gains.

“Currently, LTCG from the sale of equity shares or equity mutual funds are exempt from tax, but if you sell them within 12 months, you'll earn short-term capital gains, then you must pay 15 percent. This is how the sale of listed equity shares and mutual funds is treated,” explains Archit Gupta, founder, and CEO, ClearTax, an online tax filing portal.

What will be the impact if it is introduced?

Experts largely see LTCG tax as a deterrent for equity investors. Since demonetisation, investors have flocked to equity markets and mutual funds (MFs), with inflows touching Rs 20,000 crore in November. For December, over Rs 8,000 crore was pumped in by domestic investors (DIIs) in the equity market.

“While the implication of the impost on LTCG's may sound like a death knell to investor sentiments and have an immediate adverse effect on the markets. Investors could shy away from equities and look at alternate investment modes,” Venu Madhav, Chief Operating Officer, Zerodha told Moneycontrol.

Meanwhile, ClearTax’s Gupta added that the amount of money coming into the market is massive. If this taxation is introduced, that confidence can get hurt

Is this a good time to roll it out?

While market participants believe that the introduction of such a tax could be a negative, even if it is implemented, would this be the right time to do so?

“Even if there is a need to introduce it, now is not the right time for that. I would say why get it at a time when the situation is looking bright for this industry,” Kamlesh Rao, Managing Director, and CEO at Kotak Securities told Moneycontrol. Gupta also concurs with this view, adding that the move will be seen as a very ‘anti-investor measure’.

Alternate Suggestions:

Experts like Madhav believe that the government may increase the holding period to three years. “It will require investors to orient themselves for minimizing portfolio turnover by focusing on buying stocks with a longer-term perspective.

“Without being judgmental about the outcome in the budget, investors should focus on what is most likely to happen rather than what should happen,” he said. One could also tax LTCG at different slabs, he added

While Gupta believes the existing securities transaction tax (STT) is a good system. “In any case, securities transaction tax (STT) is applicable on equity transactions done over stock exchanges. We hope this tax would not be introduced,” he added.

Sooner or later:

It is a move that is bound to happen, believes Madhav. “Considering that the government exchequer is in perpetual need of funds much so after the recent reductions in the collection of GST,” he said.

The talk of such a tax had been hinted by Prime Minister Narendra Modi in a speech last year. In December 2016, he had hinted at a likely introduction of a tax on income from stock markets. “Low or zero tax rate is given to certain types of financial income. I call upon you to think about the contribution of market participants to the exchequer,” the Prime Minister had said.