Taxation is an area where trust needs to be strengthened. India’s capital market taxes are often discussed in isolation, but investors don’t think of it that way. Capital is global and comparisons are inevitable.Take the Securities Transaction Tax (STT). India remains one of the few major stock markets that imposes a transaction-level tax on every transaction. The United States doesn’t have that. Japan doesn’t have it. Most Southeast Asian markets, including Singapore and Hong Kong, have consciously waived such taxes to keep markets liquid and competitive. Europe experimented with transaction taxes in selected countries, but saw volumes migrate elsewhere.
STT may be easy to collect, but it is imposed regardless of profitability. Over time it becomes a burden on the participation itself. Even a clearly articulated roadmap to gradually reduce STT would go a long way in improving market sentiment. Unfortunately, the STT has risen to relatively high levels in recent years, and the hope is that some relief will come this year.
The same logic applies to the Commodities Transaction Tax (CTT). Since the introduction of CTT in 2013 for non-agricultural commodities, trading volumes have taken a significant hit. If the goal is to build deeper and more efficient commodity markets, this tax should be reconsidered. A mature commodities market is critical to supporting industrial users, infrastructure players and wider commercial interests as the economy grows.
Long-term capital gains tax (LTCG) is another area where the global context is important. The US taxes long-term gains, but offers various incentives related to holding periods and effectively adjusts for inflation through its tax structure. Many European countries lightly tax long-term stock gains or exempt them under specific conditions. Singapore and Hong Kong do not tax capital gains at all. India controversially reintroduced LTCG on listed shares in 2018. While investors have adapted, the bigger problem today is predictability, especially for foreign portfolio investors. Frequent interpretation problems, treaty-related uncertainties and the lingering fear of retroactive measures contribute to India’s risk premium. Stability and simplicity would be much more important than marginal interest rate adjustments. Year-on-year changes in particular tend to disrupt investor sentiment.
Short-term capital gains are taxed in all jurisdictions, but in India they are on top of an already high STT and other levies. If we look at each tax individually we miss the point. The markets would prefer a simpler, more rational structure, even if it means lower fees combined with broader participation. After all, India’s scale, with over 13 crore unique demat accounts and a steadily growing base, can offset lower rates through higher volumes.
Broadening the tax base can free up significant government revenues through direct taxes and indirect levies such as GST.
Investment funds deserve special attention in this discussion. The SIP culture has transformed Indian markets, with monthly inflows providing a stable counterbalance to volatile global flows. However, private investors are extremely sensitive to tax changes. Sudden shifts in taxation of debt or hybrid funds create confusion and hesitation, often pushing savers back into unproductive assets like real estate or risk-averse, low-return instruments like bank fixed deposits. This is counterproductive for mobilizing risk capital.
If India wants sustainable domestic capital formation, mutual funds must be supported with predictable, long-term tax treatment. The aim should be to keep household savings firmly within the formal financial system.
Over the past two years, more than 500 companies have raised capital through the Indian IPO markets. This reflects not only favorable market conditions, but also growing entrepreneurial momentum. IPOs combine private ambitions with public participation, and private investors have played an increasingly important role. They take risks by investing in newly listed companies, but often feel punished because they protect capital by selling post-listing. Speculative behavior is an inherent part of capital formation and should not be discouraged as it can hinder efficient price formation.
Today, retail investors directly own about 10% of the Indian stock markets through direct shareholdings. They own another 10% through investment funds. In fact, a fifth of India’s listed equity assets belong to households – and this share continues to rise.
This is a structural shift that must be exploited. Long-term participation cannot thrive in an environment in which long-term savings is repeatedly taxed more than necessary. If policymakers want patient capital to finance capital investment, innovation and business expansion, long-term equity ownership must be actively encouraged.
The economy must regain momentum. From that perspective, one of the most effective ways to do this could be a decisive expansion of government capital spending, especially in defense. The political instability in South Asia is very worrying. India stands out as the only stable and legitimate democracy in the region, surrounded by countries facing economic problems and political unrest. This reality underlines the need for significantly increased investments in national security in the coming years.
Besides defence, preparing the infrastructure for a Viksit Bharat with multi-year visibility will be critical to sustaining long-term growth. If the government wants to meaningfully increase capital spending in the coming year while keeping fiscal discipline below 5%, it must sharply curtail revenue expenditure.
Currently, revenue expenditure accounts for almost four-fifths of total government expenditure, while capital investment accounts for only one-fifth. This rebalancing will be a political challenge, but it is necessary to secure long-term gains even at the cost of short-term pain.
With inflation relatively low, this could be the ideal time to roll out an ambitious, multi-year National Infrastructure Plan over the next five years.
(Tejas Khoday is co-founder and CEO, FYERS)
#Union #Budget #markets #rebuild #retail #investor #confidence