Budget 2025 wishlist: Parity between debt and equity taxation

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Subscribe to enjoy similar stories. There was a hue and cry after the Union Budget 2024-25 as the Centre increased the long-term capital gains (LTCG) tax on equity from 10% to 12.5%. However, since April 2023, the benefit of indexation has been taken away from debt-oriented mutual funds (MFs), and it is taxable at marginal slab rate (MSR).

For most investors, the MSR is 30%. This is a skew. The logic behind a relatively lower LTCG rate for equity than the MSR for majority investors is that the nation requires capital for growth.

Incentivizing people to invest in equity would lead to a source of capital for the corporate sector. However, corporations raise capital through the issuance of bonds as well. In terms of importance in the overall picture, bonds as a source of capital are not a poor, distant cousin of equity.

The outstanding quantum of corporate bonds is ₹50 trillion, which shows their importance. There is no exact corresponding number for resources raised through equities, but there is a ballpark estimate. India's market capitalization (National Stock Exchange of India, 22 January 2025) is ₹421 trillion/$4.87 trillion.

However, this is not the quantum of capital raised by corporations. The resources that have flowed to corporations are the face value of the shares or face value plus premium if the primary issue was at a premium. Market capitalization is the product of outstanding stock and market price.

As we all know, the market price is multiple times the face value. In other words, the corporate sector has availed of a fraction of ₹421 trillion through the issuance of shares. The ballpark estimate for discussion purposes is 20%, which is around ₹84 trillion.