Create harmony in capital gains tax

economictimes.indiatimes.com:

Taxation of capital gains has again gained currency in the run-up to the budget. Specifically, the treatment of capital gains arising from equity ownership. Theoretically, there is little to justify differential treatment of capital gains arising from separate asset classes.

In practice, however, taxation is used to direct household savings into more productive investments. In India, capital gains from equity are treated differently in terms of tax rate, investment tenure and inflation indexation. The Indian stock market is now considerably mature, and the savings-channelling reason for tax-advantaged treatment of equity ownership becomes less pressing.

However, addressing the tax anomalies runs into the prospect of heightened market volatility.

There is a more fundamental difference in the treatment of capital and labour where the effective tax rate favours the former. This leads to widening inequality as the economy grows. India is the fourth largest in the world in terms of market capitalisation and the fifth largest in terms of GDP.

Given the relatively low exposure to equity in the country, wealth concentration is acute. More taxes are being raised from productive activity than wealth creation, which has spillover effects on the economy's growth potential. It also limits tax revenue growth so long as arbitrage is possible between wage and capital income.

However, doing away with the arbitrage entirely may not be advisable.

Since the incidence of tax relative to per capita income is quite high, tax-advantaged capital gains have a redistributive logic. This argument will fade as a bigger part of the workforce enters the tax-paying bracket. Unlike developed economies, India has time to balance taxes on capital