The one segment of the economy that is most excited by the Union Budget each year is the capital market. What are the key expectations of the markets from the Union Budget 2019?
Enough of LTCG tax
Budget 2018 introduced the 10% tax on long term capital gains on equities and equity funds. In the last year, it hardly resulted in any worthwhile revenues. On the contrary, it has taken away the attractiveness of equities for investors looking to create wealth. Considering that the STT was introduced in 2004 in lieu of the LTCG tax on equities, it is only logical that this LTCG tax is scrapped. The STT is already doing a good job of generating nearly $1.2 billion for the government and the LTCG tax only has nuisance value.
Time to free dividends
In India, dividends get taxed at multiple levels. Despite being a post-tax appropriation, dividends are subject to DDT and also to tax in the hands of the investor for annual dividends above Rs.10 lakhs. This makes dividend more tax heavy than interest and is in fact inducing companies to resort to buy backs just to save the tax incidence of dividends. To begin with, the budget can look to make dividends on equity funds free of DDT. That will, at least, not throw long term financial plans off tangent for majority of investors.
Rationalize transaction tax
For a moment let us cover the transactions on all segments viz. equity, derivatives and commodities. Currently, equities and F&O transactions are subjected to STT while all commodity transactions are subjected to CTT. In a market where traders are the backbone when it comes to creating liquidity and depth in the markets, this STT and CTT are literally driving away the short term traders. Of course, STT is a resource generator and they may not be keen to get rid of it. However, they can make a start by scrapping CTT on commodities transactions since that is still a nascent market. Also, the STT on intraday transactions can be scrapped to make markets more liquid.
Keep the FPIs happy
The Indian markets are still largely driven by FPIs as they influence equity prices and the currency value. Firstly, FPIs prefer fiscal responsibility targets to be met. Constantly pushing the goal post does not go down well with serious FPIs. Secondly, the issue of taxation of FPIs and the hounding of P-Notes still continues. It is time the government uses the budget platform to come out with a white paper on FPIs and give them comfort on the tax and the P-Note front. India needs FPIs to give robustness and depth to the markets. Taking care of FPIs will be like hitting two birds with one stone! ©