Indian stocks have an earnings problem that a tax cut cannot solve. Lower taxes would let investors keep more of their gains, but the companies they own would still have to justify their share prices.

There is a case for reviewing the tax burden. Securities transaction tax, or STT, applies even when investors lose money. Those who sell at a profit may also face capital gains tax. Lowering that burden would improve returns after tax, without improving the businesses generating them.

The earnings picture explains why this matters. Fellow BasisPoint columnist Dhananjay Sinha examined more than 1,700 companies in the April–June quarter. Sales rose 25.6% year on year, but raw-material costs jumped 40%. By his measure, nominal value addition fell 4.5%.

That sample is not the entire market, but it offers a warning: faster sales need not mean stronger earnings. Companies can defend margins by squeezing other costs, but that leaves investors asking how long the savings can last.

Stronger demand and productivity would provide a more durable foundation, particularly for buyers paying high prices today for several years of earnings growth.

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Growth Shortage

Brokerage Bernstein sees another problem. It argues that many Indian large caps belong to a “bygone economic era” and lack the growth to justify their valuations. Companies with the deepest pockets, it says, are often consolidating established businesses rather than backing emerging industries. Its concern is not simply what these companies earn today, but where tomorrow’s growth comes from. That is Bernstein’s assessment, not a verdict on every large Indian company.

Smaller companies might offer that growth, but foreign funds cannot necessarily buy enough of it. Many lack the free float, liquidity or research coverage needed for a sizeable investment. Finding a potential multibagger is less useful when building a position drives up its price and selling it pushes the price down.

Cheaper transactions would leave that mismatch intact. Big funds need businesses that combine growth with enough stock to buy and sell. A lower tax bill supplies neither.

Whole Bill

Rising tax collections can look especially hard to defend when households are losing money in the market. But buoyant collections alongside falling share prices do not prove that taxes caused the decline. STT tracks trading turnover, not investment success. Capital gains tax can capture profits accumulated well before a market slide. The receipts tell investors what they paid, not why their portfolios fell.

Any review of trading costs should also look beyond taxes. Published cash-equity charges are around ₹307 per ₹10 million traded on the NSE and ₹375 on the BSE, on each side of a trade. SEBI’s fee on non-debt securities is ₹10 per ₹10 million.

Those charges have different purposes and help fund trading infrastructure and oversight. That does not put them beyond scrutiny. A debate about reducing investment costs should examine the whole bill, rather than assume the exchequer alone must take a haircut.

Reworking STT and capital gains tax could benefit long-term shareholders. A review should identify the beneficiaries, the behaviour it seeks to encourage and the revenue forgone. The case for reform need not depend on a promise that foreign money will follow.

A tax cut might bring buyers back after a sell-off, but keeping them requires companies that can justify their prices. A smaller tax bill is a saving, not an investment thesis.