Sunday, 7 January 2018

Taxing the LTCG: A Goose is not made of Eggs

There are talks that government may introduce tax on LTCG (long term capital gain on holding the stocks for more than a year) earned in stock markets in the coming budget which earlier were exempted. 

Government most of the times is an institution/system whose sole motive is to collect taxes, whose sole expertise is to waste the resources thus collected/generated because their sole purpose is to stay in power. Taxability of LTCG, if really planned, is another example of this. Raising tax rate and taxing everything is never the best economic tool to create wealth and growth. High tax rate, in fact, points towards inefficient use of resources by Govt. High taxes should be resorted to only in case of emergency…to meet out short term emergencies like Wars, droughts. Instead, government should focus on making more efficient use of capital/resources in the country in order to increase the income levels of general public on which it can collect even more taxes even at lower tax rates.

But government can’t think like a businessman although it always thinks of taxing them. Government as a businessman is a failure most of the times. Look at railways, government can keep railways for its income purposes (instead of taxes) as it can be a big cash cow but what government has achieved in Railways!! Terrible passenger service, crowded trains, highest freight rates globally, very low and falling share in the freight sector with road accounting for 70% when the same is just the opposite in other developing and developed countries. Road transport is a guzzler of oil which India imports heavily. So focusing and promoting Railway transport is a no brainer but not for our brainless leaders who only can think that they can collect higher taxes from higher consumption of oil!! So no serious effort to promote electrified (electricity from local coal, another positive increasing the income level of general public instead of wasting money on oil imports) railway transport but they want to increase taxes.

Air India is a baseless dead well…a black-hole. Agriculture is in a complete mess which is when our country is “Krishi-pradhan”. Farmer gets just 30% of the final price paid for his crop so he is poor and dying but government thinks it can only waive loans (by imposing higher taxes) to help them. Warehousing and cold chain is just ignored completely…Institutions like FCI exist only for corruption. They buy substandard crops like wheat from big guns of agriculture at low prices (showing as normal purchase at much higher MSP and pocketing the difference) and then later on declare in the public that the entire crop has been rotten due to rats/rain and everybody in the government knows this but they want to increase taxes. 

We lose more than 1 lac crore of agriculture produce due to third grade supply chain still no serious efforts will be done for the same but they want to raise more taxes to cover their nonsense. High logistics costs result in the higher cost of production and loss of export opportunity. Warehousing/cold storage is costly due to high power cost but our power plants are running at low capacity but still our leaders can’t match the supply-demand equation here. I always feel that our leaders should recite the story of Golden egg laying goose every day in the parliament and we can pray that on one fine day they will understand the meaning of it and from that day they will at first think of reducing wastage of money and corruption (mainly at their end) and raising of the income level (mainly of general public) before going after the taxes.

An economy is a complex thing and the best way to bring the growth equilibrium is to maintain zero sum game which is when demand is matching with supply. A fool can think that by plucking mangoes from a tree full of mangoes and then tying the same to the branches of an apple tree with very few apples will result in even number of fruits on both the trees. But he’ll find the apple tree dead after few days because the apple tree was in need of water and fertilizer.

And more harm will be inflicted on the mango tree if the tree was just growing and mangoes were not ripen. Raw mangoes will also not serve any purpose. This is precisely what our Government is trying to do by taxing the LTCG. Indians has never invested in financial assets; gold and real estate was always their favorite. The main reason of the same is illiteracy, lack of knowledge of financial assets and innocence (or black money!!). So the outcome of that was huge outflow of money from the country on huge gold imports, high price of housing and land making them costly for a common man with no real use of that money. Genuine buyers requiring land for very important businesses like warehousing find land costs too high which result in the higher cost of their product/services. But our leaders can’t see this mismatch.

But at last Indians are getting aware of the benefits of financial assets like equities and first time domestic inflows into stock markets are more than foreign inflows. At present, top 100-200 stocks attract around 90% of the total trading volume because participations from the general public is very less. A strong widely traded stock market is a great tool for the growth of an economy. More businesses will come to stock market for meeting their funding requirements which will promote industrial growth in the country. Risky ventures like businesses should get finance through equity rather than bank debt. Very few can risk their assets for taking bank loans for financing their new businesses. This is the one reason Indian people always look for jobs as funding from investors is not an Indian phenomenon.

And companies getting funding through equity generate profits, generate employment, pay taxes on their profits, pay more taxes on dividend distributed, people who trade pay STT on buying and selling of shares…what else our government wants!!! To kill the golden egg laying goose!!

Democracies are dangerous because in it, most of the times, governments are formed to enjoy the power not for the upliftment of the poor and needy and overall growth. Governments do the brainstorming only to offer rice/wheat at Rs. 2/per KG to poor people instead of taking the pain to raise their income level to enable them to buy milk and meat on their own. That’s why sometimes I think that dynasty ruling system had one big advantage that they would find one magnificent ruler like Maharaja Ranjit Singh and Akbar once in a while who could bring tremendous growth and peace only on the basis of his vision and action. They had another big advantage that if their dynasty ruler happened to be a looser then some better rival of another dynasty/insider would throw him out because at the end of the day it was all about removing one person.

I have high regards for Modi government and have serious doubts that the government will pursue the taxing LTCG as the same will break the rhythm of development of financial markets in India. I hope that status quo (or at the most some very lighter version will be introduced) will be maintained or else be ready for a mango-less summer this year!!