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Social Benefits of Stock Market Speculation
Context:
The Government of India, in its Budget, raised taxes on both short-term and long-term capital gains made in the stock market and also raised the securities transaction tax on derivatives transactions.
More in News:
- The government has proposed a uniform long-term capital gains (LTCG) tax rate of 12.5% across all asset classes, replacing the previous tiered structure with indexation benefits.
- The tax rate for short-term capital gains on equity-related investments has increased from 15% to 20% for assets held for less than 12 months.
- Additionally, listed securities will now be classified as long-term after a holding period of 12 months.
Reasons for Government Action:
- The fundamental belief behind the idea of imposing higher taxes on stock market profits is that gains from stock market speculation are akin to gains from gambling.
- The Economic Survey 2024-25 argued that unlike developed countries, a developing country such as India cannot afford to waste its limited savings on stock market speculation.
- Capital gains made in the stock market are somehow seen as easy profits earned by investors without providing any useful service to society.
- Capital gains are seen as a major reason behind growing inequality and taxing such gains is deemed good for society.
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About Speculative Trading:
About Capital Gains and Derivative Trading :
Derivative Trading:
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Social Implications of Capital Allocation:
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Pros of the Government Action
- Increased tax revenue for the government
- Simplification of Tax Structure
- May discourage short-term speculation
- Could promote long-term investing
- Might stabilise market volatility
- Aligns taxation more closely with other asset classes.
Cons of the Government Action:
- Removal of Indexation:The benefit of adjusting the purchase price of an asset for inflation (indexation) has been removed for all assets.
- The new rule simplifies the tax structure by setting a flat 12.5% tax rate for all long-term capital gains. However, it removes the indexation benefit.
- Indexation is a method used to adjust the purchase price of an asset (like property or gold) for inflation over the years.
- Decrease in Market Liquidity
- Short-term traders play a crucial role in providing the liquidity needed for long-term investors to buy or sell based on fundamental analysis. Without this liquidity, long-term investors would face challenges in executing transactions effectively.
- Reduced attractiveness of stock market investments leading to Potentially lower trading volumes.
- Higher costs for traders and investors.
- Possible outflow of foreign investments.
