Union Budget India 2019: The long term capital gains (LTCG) tax saw a comeback in the last year budget, but with gains being grandfathered, and keeping the LTCG not being taxed till a certain limit helped keep the markets at a check after its announcement. However, going forward, the LTCG tax is a cost that every long-term investor in direct equities or equity mutual funds will have to bear. The Union Budget India 2019 will be closely watched by investors in the hope of some good news on the LTCG tax front.
From April 1, 2018, the long-term capital gains realised above Rs 1 lakh in a financial year are subject to 10.4 per cent tax while the short-term capital gains will continue to be taxed at 15 per cent if held for less than 12 months. As a relief, gains made till January 31, 2018, will not be subject to this new LTCG tax and hence be grandfathered.
Meanwhile, market participants are expecting some modifications in the upcoming Budget 2019 to be presented by the newly-appointed FM Nirmala Sitharaman.
In an email interview, Tejas Khoday, Co-Founder & CEO, FYERS, a technology-focused stockbroking firm, shares his Budget 2019-20 expectations and what the market is looking forward to on July 5, 2019.
The newly appointed Finance Minister, Mrs. Nirmala Sitharaman, as well as her ministry officials, have considerable economic challenges staring ahead and need to hit the ground running, immediately. In light of the challenges, FM would be walking a tight rope to balance fiscal deficit and spending, with a strong focus on higher tax revenues, a larger divestment portfolio and windfall from RBI (based on the Bimal Jalan Panel recommendations), to support the numerous welfare schemes and reduce govt borrowing from the market. Any measures to uplift the economy would surely be helpful while companies’ expectations of a reduction in corporate tax might not be entertained.
The options are considerably less for the government to loosen its purse strings, especially in the 1st year, after a fresh and an overwhelming mandate returning them to power.
Expecting any major changes, incorporating exemptions or relief to retail investors would not be appropriate, considering the fact that govt needs hefty revenues, boosted by direct and indirect tax collections as well as other windfall gains. Govt has severe challenges ahead and 2019 budget might not offer much to retail investors in general. Moderate expectations are the need of the hour.
After a volatile year between 2018 and 2019 budgets, where more than 75% of BSE All Cap Index gave negative returns, the stock market has shown a little life and colour over the last couple of months with equity fund flows seeing a minor rise, accompanied by retail investor participation. Any measures to boost investor sentiment would be greeted with a cheer, which could include:
1. Reducing LTCG tax arising from the sale of equity shares (without indexation benefit)from the current 10 per cent to a level of 5 per cent.
2. Increasing LTCG exemption gain from the current Rs. 100,000 to Rs.200,000 and above.
3. Removal of current 10 per cent LTCG tax on equity mutual funds.
Alternately, any move to increase the time period of LTCG tax from the current 1-year period to a 2 or 3-year period would severely dampen the stock market sentiment.
During the Budget 2018 speech, former FM Arun Jaitley while announcing the LTCG tax imposition was of the opinion that the govt would garner close to Rs. 20,000 crore in the 1st year of implementation. A very volatile year for the stock market in FY19 would surely ensure minimal LTCG tax collections for FY19. Considering the fiscal situation and revenue requirements, expecting the government to rethink on LTCG in the upcoming budget would be a futile thought.
Tax collections are the need of the hour and the government is looking at ways and means to collect more. Hence, not expecting any increase in exemptions or relief in taxes is a foregone conclusion.
The stock market has been listless over the last 18 months with retail investors losing heavily due to severe volatility in mid and small caps. Also, the stock market has been besieged with news of corporate frauds or poor ethical and corporate governance by many companies which have resulted in stock prices crashing by 70 – 80 per cent in a short period of time.
Equity fund flows have been severely dented and are way below the 10,000 crore per month average mark seen in 2018. Trust deficit and credibility issues are a couple of reasons for retail investors to shy away from stock market investments. The government needs to adopt and enforce stringent measures to restore investor faith and confidence in businesses, laws and regulations.