Budget 2016: The imposition of a higher securities transaction tax (STT) on options and a proposal to tax dividend income beyond Rs 10 lakh, at 10%, in the hands of the recipient spooked stock markets on Monday. Investors reacted badly to several other proposals including the marginal rise in the government’s capital expenditure though the large allocation for rural India which should put money in the hands of farmers and boost consumption was welcomed.The Sensex closed in the red after some wild gyrations intra-day, ending the session at 23,002.00, down 152.30 points. The broader Nifty ended at 6987.05, down 42.70 points. The advance-decline ratio was negative but some mid-cap indices ended in the green.
The allocation of Rs 25,000 crore for recapitalising state-owned banks in FY17— as part of the Indradhnush programme — went down poorly with investors since the estimated requirement is far higher. Investors were also not convinced by the finance minister’s assurances that, if needed, the government would infuse more capital into banks. Banking stocks plunged initially though they recovered later.
Pointing out that the tax on dividend income of Rs 10 lakh amounted to double taxation, Manoj Purohit, director, Grant Thornton Advisory, said the proposal to tax dividends in the hands of resident individuals, HUF and firms would discourage investors. “Such a move may deter them from investing in equities for the long-term and in effect would accelerate exit from the equity market prior to declaration of dividend and book closure dates. This also creates a disparity between resident and non-resident investors as non-resident investors have been kept outside the purview of the proposal,” Purohit observed.
The markets which had been hoping the implementation of General Anti-Avoidance Rules (GAAR) might be postponed by a year were disappointed it would become effective from April 2017. Rajesh H Gandhi, partner, Deloitte Haskins & Sells, said investors were probably hoping GAAR would be deferred since there is a slowdown in the global economy and the government is looking to attract foreign investments. “Both resident and non-resident taxpayers will now start re-looking their corporate structures to ensure they are GAAR complaint before the law kicks in next year,” Gandhi said.
Investors, however, were mollified by the government’s commitment to stick to a 3.5% fiscal deficit for FY17 and the announcement of a roadmap for consolidation of PSBs. The fiscal prudence will give th Reserve Bank of India (RBI) room to cut interest rates according to Vinay Khattar, Senior VP, Edelweiss Financial Services. The higher allocation to the infrastructur sector of Rs 2.21 lakh crore compared with the Rs 1.8 lakh crore in the current fiscal was welcomed.
Moreover, market experts pointed out that the absence of a big hike in the service tax to 16% which had been widely anticipated had not been effected. The service tax has been hiked by 50 bps.
The rebound, like the initial drop, was led by banking stocks as the BSE Bankex outperformed the broader markets
Finance minister’s announcement on General Anti-Avoidance Rules has disappointed a section of markets
Experts welcome higher allocation of Rs 2.21 lakh crore compared with the R1.8 lakh crore to infrastructure sector