In my last article, Tax Harvesting Secrets: Turn Capital Gains into Tax-Free Wealth, I explored how investors can strategically realize gains and losses to minimize their tax liability. While tax harvesting is a powerful tool for individual investors, it also highlighted a broader issue: India's complex and often burdensome tax structure. This got me thinking-how do these tax policies impact the broader market? Why are Indian share markets crashing despite the country's strong economic fundamentals? The answer, as it turns out, lies in the government's tax moves, which are backfiring in more ways than one.
Let's dive in. ("Please proceed only if you are completely free from political biases.")
Alright, let's cut through the noise and get real for a second. The Indian share markets are in a freefall, and everyone's pointing fingers-global inflation, geopolitical tensions, you name it. But here's the tea: the Indian government's tax strategy is one of the biggest culprits. Yeah, you heard that right. Let's break it down in a way that even your coffee-addicted brain can process.
The Global Tax War: Why India's Losing
Picture this: countries around the world are in a full-blown tax war. The U.S. dropped its corporate tax rate from 35% to 21% in 2017, and places like Dubai and Ireland are out here flexing. Meanwhile, India's like, "Hey, we cut ours from 30% to 22% in 2019, isn't that enough?" Spoiler alert: It's not.
Trump Effect: "We will bring down corporate tax to 15% if you make your product in the U.S
In today's hyper-competitive world, money flows where it's treated best. And right now, India's tax rates are like totally out of sync with the global vibe. This has made India less attractive to big players like Foreign Institutional Investors (FIIs), who are now taking their cash to countries with better tax deals.
FIIs Are Ghosting India
FIIs are like the cool kids in the stock market-they bring the hype, the money, and the momentum. But guess what? They're ghosting India. Why? Because they've got better options. With the U.S. and other countries offering lower taxes and higher returns, FIIs are ditching Indian stocks faster than you can say "market crash." And when FIIs leave, domestic investors panic and start selling too, making the situation even worse. It's like a domino effect, but nobody's winning.
The Government's "Oops, We're Late" Moment
Here's the kicker: India's tax cuts in 2019 were a classic case of too little, too late. While other countries were slashing rates and attracting investments, India was chilling in the background, thinking, "We'll figure it out later." By the time the government finally acted, countries like Hungary were already stealing the spotlight, pulling in way more foreign investments than India.
And now, with the U.S. talking about another tax cut (down to 15% for domestic manufacturers), India's like, "Wait, we just caught up!" But the truth is, India's still playing catch-up in a game where the rules keep changing.
The Rich Are Leaving: A New Angle
Adding to the market woes is the alarming trend of wealthy Indians leaving the country. According to recent reports, over 4,300 millionaires are expected to leave India by the end of 2024, following the 5,100 who left last year. High-net-worth individuals are relocating to global hubs like Dubai, London, and Singapore. They cite reasons such as high taxation, poor civic infrastructure, and a lack of quality public services.
This exodus of wealth and talent is not just a loss of human capital but also a significant drain on the economy. These individuals often take their businesses and investments with them, further exacerbating the market downturn. The government's complex tax structure and lack of world-class amenities are driving this trend, making it harder for India to retain its top talent and wealth.
The New Tax Twist: Capital Gains Tax and Tax on Dividends
Now, here's where it gets even juicier. The government's recent changes to capital gains tax and trading income tax are starting to show their impact on the market. Let's break it down:
- Long-Term Capital Gains (LTCG): Earlier, LTCG on stocks held for more than 12 months were taxed at a flat rate of 10%. Now, the rate has been increased to 12.5%. This might seem like a small hike, but it adds up, especially for long-term investors who are now seeing lower returns on their investments.
- Short-Term Capital Gains (STCG): For stocks held less than 12 months, the tax rate has gone up from 15% to 20%. This makes short-term trading less attractive, as the higher tax rate eats into profits.
Dividends: Earlier, dividends were tax-free in the hands of investors. But now, they're taxed as per the individual's income slab rate. This has significantly reduced the net returns for investors, especially those in higher tax brackets. For retirees and income-focused investors who relied on dividends for steady cash flow, this change has been a major blow.
These changes have made trading and investing in the stock market less appealing, especially for retail investors and traders. The added tax burden is discouraging participation, leading to reduced liquidity and increased volatility in the markets.
What's Next? More Tax Cuts or More Chaos?
Here's the reality check: if India doesn't step up its tax game, things are going to get worse. The government needs to stop being reactive and start being proactive. Lowering corporate taxes even further might sound scary, but it's the only way to keep up with the global tax war. Otherwise, India risks becoming an "Investment Desert", with stunted growth, fewer jobs, and a stock market that's stuck in a downward spiral. Let's keep our hopes on the upcoming Union Budget!
The Bottom Line
The Indian share markets are crashing, and a big reason is the government's tax strategy. To fix this mess, the government needs to:
1. Cut corporate taxes further to match global standards.
2. Expand the personal tax base to make up for lost revenue.
3. Stop being reactive and start planning ahead.
So, if you're wondering why your portfolio is in RED, now you know. It's not just global chaos-it's the government's tax game.
The author can also be reached at cacs.abhishekagarwal@gmail.com
Disclaimer: The above content has been prepared for general information purposes only. This is not intended to constitute a recommendation, offer or advice. It does not constitute a solicitation to any class of persons. I do not warrant that the content is accurate or complete and disclaim any and all liability to anyone for any loss or damage caused by errors or omissions.
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