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LTCG tax unpopular but beneficial, says FM Jaitley

New Delhi:Finance minister Arun Jaitley defended the imposition of long-term capital gains (LTCG) tax on equities in the Union Budget, but acknowledged that it was an unpopular decision.
But unlike the previous Congress-led United Progressive Alliance government, the BJP-led National Democratic Alliance government was not afraid to “bite the bullet” on tough decisions, Jaitley insisted.
“Whether it’s demonetisation, Insolvency and Bankruptcy Code or Goods and Services Tax (GST), these are difficult decisions… I can’t recollect between 2004 and 2014, a single structural reform of this kind being taken, the kind that we have undertaken,” Jaitley said during a discussion on Budget 2018-19 in the Lok Sabha.
Jaitley did not just take the political battle to the opposition, he also reaffirmed the government’s commitment to pursue politically tough reforms. By focusing on the rationale behind the LTCG tax, he also implicitly defended an attempt at income redistribution — cast as a rich versus poor debate, the message could reap the BJP an electoral advantage in next assembly polls and the national polls in 2019.
“Structural reforms may be of momentary difficulty, but in the medium and long run, they bring huge dividends to the economy,” Jaitley argued. Elaborating on the contentious 10% LTCG tax on equity investments proposed in the Finance Bill, he said it was to correct an anomaly whereby the incentives were unfairly skewed towards high net-worth entities and individuals.
“Exempted income from long-term capital gains last year was Rs 3.67 trillion. Some are small investors. So we said up to Rs 1 lakh of capital gains, there will be no tax. The other investors are large corporate houses, foreign investors, high net-worth individuals and limited liability partnerships. This was an exemption enjoyed by the wealthy,” he added. Jaitley claimed that the 2018-19 budget presented on 1 February as well as his earlier budgets had provided relief to the middle class.
“The tax benefits given to the salaried class and pensioners in next fiscal’s budget will cost the exchequer Rs 12,000 crore,” he pointed out.
The finance minister said though demonetisation was a difficult decision and it had its own impact, economic growth did not fall by two percentage points as feared, referring to a statement by former prime minister Manmohan Singh.
“The year prior to demonetization, India’s growth was 7.1%. Has there been a two percentage point fall in GDP in the next year (2017-18)? This year, we are assumed to grow at 6.7%. The difference is 40 basis points. This is also because of GST,” Jaitley said.
Jaitley emphasized that 40 basis points was the impact of all structural reforms and that the economy is now back to normal with a broader income tax base, an expansion of the digital economy and increasing direct tax receipts. “Even after all big structural reforms, all the early indicators such as core sector, demand, exports, PMI data, investment show signs of a pick up,” he added. The Economic Survey expects the economy to grow in the range of 7-7.5% in 2018-19 from an estimated 6.75% in the year ending 31 March.
Jaitley said the government is conscious of the challenges such as agriculture, poverty alleviation, creating more employment.
“The best part of the budget 2018-19 is the focus given to reviving the rural sector,” said, NR Bhanumurthy, professor at the National Institute of Public Finance and Policy.
Targeting the Congress party, Jaitley said, “These challenges have not arisen in the last four years. There has been historical backwardness. There have been lack of policies in the past. You have been in power for 55 years. Just introspect as to how much you contributed in either removing these problems or creating these problems.”
On World Bank Doing Business ranking, Jaitley said even after rising 30 places last year to 100th position, there is still great potential for India. “The prime minister wants us to be among the top 50. Some of the areas where we are lagging behind like enforceability of contracts, land and municipal permissions, trading across borders. If we make the necessary reforms, I think there is a huge possibility of India moving up the ranking,” he added.
The Opposition on the other hand targeted the government in the Rajya Sabha over issues of agrarian distress and unemployment. Congress leader and former finance minister P Chidambaram put 12 questions to Jaitley dubbing the government’s economic policy as a “betrayal” of the country.
Chidambaram accused Jaitley of abandoning all norms of fiscal prudence. “Before you assumed office, you promised 2 crore jobs. A proper job is employment that is regular, certain and reasonably secure,” Chidambaram said.