New Delhi:Abolishing dividend distribution tax, securities transaction tax and long-term capital gains tax on shares could burn a Rs 80,000 crore hole in tax revenue, making it difficult for the government to offer any immediate concessions.
The government has already slashed corporate tax rates, foregoing Rs 1.45 lakh crore, and more tax concessions will have to be made up for by increasing income tax on the super-rich or cutting welfare spending, both of which are not feasible, a government official aware of the matter told ET.
The benchmark BSE Sensex crossed the 40,000 mark on Wednesday, building on the big gains of Tuesday after reports that the government may abolish the three equity transaction-related taxes.
There are limited options to absorb the revenue loss if these taxes are abolished, said the official, adding that welfare expenditure for schemes such as Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) and MGNREGS cannot be cut, given weak demand and rural stress.
The Reserve Bank of India said the country’s GDP growth will slow to 6.1% this year from 6.8% last year.
Raising taxes on the super-rich to make up for the loss is also not feasible because their tax liabilities were increased in the budget this year. The effective tax rate on those earning over Rs 2 crore is 39% and on those earning over Rs 5 crore is 42.7%.
A task force set up by the government to review direct taxes suggested in its report that dividend should be taxed in the hands of recipients, while leaving rates for long-term and short-term capital gains unchanged.
Dividend distribution tax, levied at 15% on gross dividend declared by a company, contributes about Rs 55,000 crore to the total tax kitty.
The effective incidence is over 20%, after including cess and surcharge.
The securities transaction tax nets Rs 12,000 crore, while a similar amount is estimated from long-term capital gains tax, taking the total to about Rs 80,000 crore.
Revenue concerns have grown, with goods and services tax collections remaining subdued in the wake of the slowdown. Even direct tax collections have remained lacklustre and are unlikely to perk up given the slower economic growth and reduction in corporate tax rates.
If the government does not cut welfare spending or increase taxes, it would need to increase borrowing, which, at the current juncture, would suck out liquidity from the market, the official said, adding that this would further hurt industry.
Market participants and the industry have made a strong pitch for the removal of dividend distribution tax and securities transaction tax, as also long-term capital gains tax, to perk up the overall sentiment.
The government will have to increase capital gains tax if it considers removal of the securities transaction tax, the official said, adding that capital gains are taxed at a higher rate the world over and STT only makes up for a lower tax levied in India.
The government introduced 10% longterm capital gains tax in the Finance Bill of 2018. The tax is applicable on annual gains exceeding Rs 1 lakh.
Finance minister Nirmala Sitharaman had on September 20 slashed corporate tax rates to 22% from 30% for domestic companies without exemptions and proposed a competitive 15% rate for new investment in manufacturing.
Source : PTI