What are the budget expectations for the equity markets?
As a crucial Budget 2020 approaches, the focus of attention is back on the capital markets in general and the equity markets in particular. Equity markets are built on hope and hence the hope is always for a market friendly budget. Specifically, markets will look for four specific announcements.
Push ahead with reforms
Nothing excites markets as much as a government committed to reforms. One of the reasons, the Nifty and Sensex had celebrated the return of the NDA was the continuation of the reforms process. However, economic challenges appear to have slowed down the reform thrust. The government must use the budget to give a clear and unambiguous signal that the reforms process is on track and the government is fully committed to the reforms process.
Better narrative for FPIs
Indian markets are still largely dependent on the buying patterns of foreign investors. With growth rates falling and geopolitical risk rising, there is a risk-off tendency among the FPI community. The government must move quickly on giving the FPIs comfort on retrospective taxation and on major pending cases like Cairn and Vodafone. Also, the budget must refrain from proposals like higher public holding or higher taxes on FPIs which don’t go down well with the investor community.
Time to tweak LTCG
The LTCG on equities and equity funds was introduced in the 2018 budget and as per preliminary estimates it has done little to enhance revenues. That was expected. Without mincing words, it is time to get rid of LTCG tax on equities. It is not only going against the interests of the long term investor but also hampering value creation by equity mutual funds. Above all, when the securities transaction tax (STT) was introduced in 2004, it was in lieu of tax on capital gains. Subsequently, the STCG is already being taxed. But also taxing LTCG does not make any sense. In this light, the Budget 2020 needs to bite the bullet and scrap the tax on LTCG on equities altogether.
Avoid cascading dividend effect
Today dividends are being taxed at multiple levels. It is a post tax charge; there is dividend distribution tax (DDT) and dividends above Rs.1 million are also taxed in the hands of the investor. This is a huge cascading effect. DDT may be too lucrative to give up but the government can make a start in two ways. Firstly, the DDT on equity funds needs to be scrapped right away. Secondly, the tax paid on dividends (DDT) is a post tax appropriation. The government can make the DDT a pre- tax appropriation (subject to dividend yield limit) so that companies get tax breaks. That could be huge!