By Amit Kumar Gupta
People who grew up in the 1980s/90s would remember the kind of anticipation and excitement the New Year Eve entertainment program of Doordarshan (DD) used to ignite amongst middle class households. While the elite partied the whole night, the middle classes would usher in the new year sitting in front of their B&W TV sets, listening to Gurdas Mann singing his most popular song – Dil da maamla hain and watching some sundry comedians trying hard to make people laugh.
Somewhat similar is the situation with the Union budget now.
In earlier days, the rich would eagerly wait for the budget for incentives to make investments and loopholes to evade taxes. The middle classes would wait for some tax concessions. The poor would anticipate more subsidies and welfare schemes.
That situation prevails, no longer.
Tax incentives and deductions have been largely rationalized. Tax rates are mostly predictable. Indirect taxes are out of budget and totally in the realm of the GST council. Most welfare schemes have been transferred to states.
The union budget is now a boring accounting exercise. Changes to tax on long term capital gain (LTCG) arising from sale of publicly traded equities is one such story that is served almost every year. If my message box is a benchmark, at least half the market participants are discussing and worrying about it, once again!
Budget day is usually one of the most volatile days of the year on an intraday basis as traders wildly speculate on any of the announcements made by the FM during the budget speech. Positionally, given that markets have seen decline before the budget, one can assume a lot of expectations are priced in and now the actual announcements if anything major will only induce a larger move.
Historically, whenever we have seen a sharp decline before the budget, it has provided an opportunity for traders and investors to build positions with a fresh perspective post the budget announcement.
Stakeholders are seeking massive investment in infrastructure; fiscal support for MSME; boost to private consumption by leaving more cash in people’s hand (lower taxes); higher spending on healthcare, agriculture, and education; aggressive disinvestment; lower fiscal deficit; stimulus of the housing sector; etc. No one is proposing new or higher taxes. Capital market would expect no tinkering with the LTCG or STCG. A removal of STT which has now been there as an anomaly post LTCG will be a major surprise if removed.
Finance ministers have always struggled to maintain a balance between higher social sector spending and fiscal consolidation. That struggle will continue this year also. I believe conditions are too fragile to introduce any new taxes like Estate Duty or any material hike in existing tax rates.
A major part of indirect taxes are now either in the domain of the GST Council (GST), state legislatures (Excise Duty and Cess), or international agreements (Custom Duties); the union finance minister has very limited role to play in this. This restricts her discretion largely to the direct taxes only. Moreover, since most of the direct taxes have already been rationalized, she would have very limited scope to reduce direct taxes. If anything, she can impose some new taxes or additional cess. The best outcome for taxpayers therefore would be that the FM maintains the status quo on taxes.
In view of various Supreme Court decisions, legislations, rules, and regulations implemented in past couple of decades, the Sale of public assets (mines, airwaves, PSE shares, land etc.) has to meet the criteria of sustainability, development, transparency, viability, socio-political expediency; etc. and depends heavily on the current market conditions. In the past there has been absolutely no correlation between the asset sale targets announced in the budget and actual realization. But further targets like increase in FDI of PSU banks to 74% will be watched out.
As investment advisors, we are sticking with our investment strategy and not tinkering due to budget announcements. We are overweight in top financials – both Private (ICICI bank, Axis Bank) and PSU banks (SBIN). We are underweighting on speciality chemicals and have zero allocation to metals, commodities, and API-based pharma. We continue to be positive on unlock trade and betting on discretionary consumption stocks like Devyani International, Chalet Hotels and Safari Industries, and are also overweight on the real estate sector – both developer and ancillaries and continue to invest in these stocks for our clients.
One could appreciate the “development of capital market” argument in case of investing in IPOs, PE funds, or venture funds etc., as in such cases the businesses get the much-needed risk capital. But the secondary market transactions do not pass this muster.
The incentive for longer term holding periods has failed miserably in improving market liquidity or minimizing market volatility. It is common knowledge in the marketplace that the LTCG exemption for tax has been abundantly misused for money laundering purposes. In fact, in past couple of years, the regulator and taxation authorities have also initiated action in many cases for misuse of LTCG taxation provision for money laundering.
To the contrary, the day traders, jobbers and market makers who provide the much-needed liquidity to our shallow markets, and hence motivate risk taking, deserve serious tax incentives. Abolition of Securities Transaction Tax (STT) may actually lead to material rise in daily volumes and deeper markets, thereby materially lowering the transaction cost and market volatility.
In absence of a functional retail debt market, companies depend heavily on “fixed deposits” from household investors for meeting their working capital requirements. These deposits are fully unsecured and entail high risk for investors, in lieu of marginally higher interest rates as compared to bank lending rates.
Providers of unsecured debt take much higher risk and therefore deserve more tax incentives.
(Amit Kumar Gupta manages equity portfolio at smallcase and heads the research desk at Adroit Financial Services Pvt. Ltd. The views expressed are author’s own. Please consult your financial advisor before investing.)