Increased Taxes
The Indian government has raised taxes on profits from both short-term and long-term capital gains in the stock market.
The tax on derivatives transactions has also been increased.
Reason for Increased Taxes
Higher taxes are justified by the belief that gains from stock market speculation are akin to gambling, contributing little to societal value.
The Economic Survey argued that India, as a developing country, should avoid using limited savings for stock market speculation.
Finance Secretary T.V. Somanathan mentioned that capital gains are growing rapidly and could be taxed at higher rates.
Author’s View Against This Belief
Capital gains reflect the efficient allocation of resources.
Investors who buy undervalued assets and sell them when their value is recognized help direct capital to more productive uses.
Short-term trading, which is often criticized, is essential for providing liquidity in the market.
This liquidity allows long-term investors to buy and sell shares more easily.
Active trading helps in accurate pricing of assets.
This ensures that companies with promising prospects can raise funds more easily, benefiting the overall economy.
Derivatives allow investors to manage and transfer risk.
They are crucial for ensuring that investors, such as farmers, can lock in future prices, encouraging investment and production.
While speculation may seem akin to gambling, it provides benefits such as improved market liquidity and risk management, which are vital for a well-functioning financial system.
Implications of Higher Taxes
Increased taxes may deter trading activities that provide liquidity and efficiency in the market, potentially harming both short-term and long-term investors.
Understanding the benefits of speculation and derivatives can lead to more balanced and effective public policies that support economic efficiency and growth
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