Informist, Tuesday, Jul 23, 2024
By Apoorva Choubey
MUMBAI – Equity investors had set their sights on the Union Budget since the outcome of the Lok Sabha election last month, as they expected big-bang measures by the Narendra Modi government to boost consumer demand and propel growth. What they were not expecting was higher tax incidence on capital gains or an increase in securities transaction tax for derivatives.
The unexpected tax changes, announced in the Budget for 2024-25 (Apr-Mar) today, could create a short-term volatility in domestic equities, but the risk-reward for Indian shares remains the same fundamentally over the long-term, said money managers. On the whole, the Budget was seen as a mixed bag as the government announced measures to stoke consumption, generate jobs, and improve farm incomes while also sticking to its plan to reduce fiscal deficit.
The equity market's reaction to the Budget was volatile, suggesting that market participants were struggling to gauge if the positives in the Budget outweighed the negatives. The Nifty 50 fell as much as 1.6% in the afternoon trade today but recouped most losses later to end 0.1% lower at 24479.05 points.
The wishlist of the market before the event was far bigger than what actually came in and, hence, some disappointment was natural, Umeshkumar Mehta, chief investment officer at Samco Mutual Fund, said in a note. The Nifty 50, which has gained 12% due to Budget optimism since the Lok Sabha election outcome on Jun 4, is seen vulnerable to profit booking over the next couple of sessions, because of record high bullish positions of foreign institutional investors in index futures, according to derivatives analysts.
"The budget leaves a mixed sentiment," said Aashish Somaiyaa, chief executive officer at WhiteOak Capital Asset Management. The shock was that the government has now announced steps that will basically increase tax outgo for investors, that too long-term investors across asset classes, he said. The government will raise long-term capital gains tax to 12.5% from 10.0% currently and short-term capital gains tax to 20% from 15%, but the exemption limit for long-term gains has been increased.
By changing the capital gain tax regime and mentioning that a new income tax law is in the works, the government has forced stakeholders to build in a higher degree of policy uncertainty and unmindful regulatory provisions in their business and investment plans, said Amit Kumar Gupta, founder at Fintrekk Capital. "The level of uncertainty could be gauged from the fact that the priorities outlined in this budget are materially different from the Interim Budget presented just five months ago," he said.
Moreover, some market participants are disappointed that the trend of charging tax on distribution of after-tax corporate income to shareholders continues, as buybacks and dividends are taxed at the hands of recipients. This tax structure can be interpreted as a case of double taxation, said Somaiyaa of WhiteOak Capital.
Today's announcement of taxes on buybacks could adversely affect payouts to shareholders, at the margin, and hurt return ratios and valuations of some high cash-generating companies, fear some experts. Apart from tax changes, the other big negative was that capital expenditure allocation was unchanged at 11.1 trln rupees, lower than the expected 11.5–12.0 trln rupees, said Pranav Haridasan, managing director and chief executive officer at Axis Securities.
Disappointed with the Budget, foreign institutional investors net sold equities worth 29.8 bln rupees. They also sold index futures worth 36.6 bln rupees and stock futures worth 61.7 bln rupees.
Finance Minister Nirmala Sitharaman today proposed an increase in the securities transaction tax to 0.1% of the option premium on sale of options and to 0.02% of the price of futures on sale of futures. Currently, the securities transaction tax on sale of an option is 0.0625% and on sale of futures is 0.0125%.
In the short-term, Indian equities could see some time correction as well as lower volumes in both cash and derivatives market after the changes announced in the Budget, said George Thomas, a senior equity fund manager at Quantum Mutual Fund. However, the news will be digested over time as equity remains lucrative as an asset class over the long term, he added.
Even as the equity market could see near-term corrections, Indian equities are seen continuing on their uptrend in the medium-term, extending a record-breaking rally that has taken the Nifty 50 and Sensex to lifetime highs and unchartered territories. The drivers of these gains in coming months may though be different as money will flow to other sectors from Budget-related themes that were overbought, said the chief investment officer at a local mutual fund house.
Brokerage Morgan Stanley remains bullish on Indian equities, with a bias for large-caps over small- and mid-caps. The research house has an overweight stance on financials, consumer discretionary, industrials and technology sectors. Some big surprises in the Budget today, such as the unique incentive scheme for job creation and the simplification of the tax code, including unification of TDS rates and rationalisation of import duties, and the lower-than-expected fiscal deficit, are positive for India Inc, the brokerage said in a report.
The revisions in the new tax regime and increase in standard deduction for salaried employees could mean more disposable income in the hands of consumers, which bodes well for companies such as fast-moving consumer goods players. Other beneficiaries of schemes include jewellery companies and manufacturers in industries that have seen reduction in customs duty rates. End
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