Govt seeks investor and expert views on LTCG and STT as it reviews capital market levies amid FPI exodus

The core issue highlighted is the perceived double taxation on equity transactions in India. Currently, investors face both a Long-Term Capital Gains (LTCG) tax (12.5% on stocks held for over 12 months) and a Securities Transaction Tax (STT) (0.1% on buyers and sellers). The STT was originally introduced in 2004 to replace the LTCG tax due to difficulties in tracking capital gains; however, the LTCG tax was reintroduced in the 2018-19 Budget, leading to the current dual levy. This creates transaction-level friction and increases the cost of capital, making Indian markets less attractive to foreign investors compared to jurisdictions like Singapore or Hong Kong, which often do not tax non-residents on capital gains. A potential policy shift, such as allowing STT to be offset against LTCG or eliminating LTCG for longer holding periods, could incentivize patient capital (long-term investment) over speculative trading. For UPSC Mains (GS-3), understanding the trade-off between maximizing tax revenue (LTCG mop-up was Rs 1.29 lakh crore in FY25) and maintaining capital market competitiveness is crucial.

The debate touches upon the crucial aspect of tax certainty and the interpretation of international agreements, particularly Double Taxation Avoidance Agreements (DTAAs). The article references the recent Supreme Court judgment regarding Tiger Global's exit from Flipkart. The Court ruled the gains taxable in India, denying exemptions under the India-Mauritius DTAA, applying the substance over form doctrine to prevent treaty shopping (routing investments through low-tax jurisdictions solely to claim tax benefits). This underscores the government's stance against tax avoidance but also creates apprehension among Foreign Portfolio Investment (FPIs) regarding the consistent application of treaty benefits, especially for grandfathered investments (investments made before the amendment of treaties). The upcoming budget must address this by ensuring a predictable and transparent tax regime, which is fundamental for attracting stable foreign capital required for India's economic growth. Candidates should link this to broader themes of Ease of Doing Business and regulatory stability.

Any reduction or elimination of taxes like LTCG or STT involves significant fiscal considerations, reflecting the principles of Public Finance. The central government relies heavily on these revenues; for instance, STT collections are projected at Rs 57,522 crore for FY26. A reduction in these levies directly impacts the Divisible Pool of Taxes, reducing the funds transferred to states as mandated by the Finance Commission. This potential revenue loss must be weighed against pressing expenditure needs, such as rising fertilizer subsidies (exacerbated by geopolitical tensions) and extensive social sector programs. The government might consider making changes revenue-neutral—for example, scrapping the capital gains tax on Foreign Portfolio Investment while simultaneously increasing the STT. This approach would simplify tax administration and reduce friction for foreign investors without compromising total tax collection, balancing the need for market stimulus with fiscal prudence.