India Budget 2018 impact on stock markets, long term capital gain on shares & dividend distribution tax: Investors can relax. Especially, smaller investors who have had a rocking time with equity MF investments in year 2017. FE Online’s Pre-Budget 2018 survey of fund managers, analysts, experts & economists finds that most participants expect stock markets to deliver positive returns post budget. What’s more, there is consensus amongst the participants that there is unlikely to be any change in both the current long-term capital gains and dividend distribution tax provisions. However, some expect a small twist in the LTCG tale.
FY 2017 has been an outstanding year for equities and for small investors who have poured enormous amounts of money into equity based mutual funds. That, this rise has come without there being any remarkable increase in earnings has made many wary of what lies in FY 2018-19. Union Budget 2018 will be key in setting the pace for key indices likes BSE Sensex and NSE Nifty.
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Many participants expect the markets to rise further in the new financial year but don’t expect 2017-like returns. Of the 21 people polled, 14 felt that the markets would continue their bull run, albeit, the returns would not match those seen in 2017. 3 respondents said the markets are already fairly valued, while one felt there would be a significant upside in the next FY too. Three people chose ‘Can’t Say’. “Results need to justify valuations. Going ahead, oil and metal prices are expected to go up, which will impact margins of companies. Also, with commodity prices rising, people may shift from equities. It’s a dynamic situation and the Budget is key”, says Anita Gandhi, Wholetime Director, Arihant Capital Markets.
PE multiples are on the mind of Sharekhan’s CEO, Jaideep Arora. The online brokerage says it expects returns to sober down in FY 2019 as compared to FY 2018. “There is little scope for expansion of PE multiples and consequently the returns could be in line with earnings growth in Sensex companies. Therefore, Nifty could trade in range of 10,000 to 12,000 during the next one year”, he says.
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Sahil Kapoor, Chief Market Strategist at Edelweiss Market Research expects Nifty to touch 12000 in FY19 while Motilal Oswal’s Siddharth Khemka, Head, Retail Research says Nifty could reach the highest level of 12,500 during the year, but, end FY19 around 12,000. Kotak’s Rusmik Oza forecasts 11,800, Anand Rathi’s Chief Economist, Sujan Hajra sees a 7 -10% annualized return while a big bank sees Sensex & Nifty at 36000 and 11,000 respectively.
Just like the near uniform vision for year-end Sensex and Nifty levels, most participants seem to agree that rates on long term capital gains tax may not change this year. Sixteen participants said there will be no change, while 3 felt LTCG could come under tax net. Reports in the last month indicated that India Budget 2018 may finally revisit the tax-free status of long term capital gains on listed securities. There has also been considerable speculation over making dividends taxable in the hands of the shareholder.
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“The government would not want to disturb the disinvestment process. So, long-term capital gains are unlikely to be taxed. However, what could happen is that the time-period of 1-year can be revised”, says Sachchidanand Shukla, Chief Economist, Mahindra Group. Arihant’s Anita Gandhi too sees the holding period being increased and a possibly parity for debt products. Dhirendra Kumar of Value Research says the holding period could move up to 3 years from the current one year. The current dividend distribution tax regime could also continue post Union Budget 2018, despite vociferous demands to make receipts taxable in the hands of the shareholder. Nine respondents said there will be no change in the taxation while just three felt that DDT could be altered. The remaining chose ‘’Can’t Say’’ A leading financial firm does not see any change as DDT is a stable source of income for the government. Motilal Oswal’s Siddharth Khemka points out that there isn’t any clear roadmap for both long-term capital gains tax and DDT. Sharekhan’s Jaideep Arora says that the government would not want to discourage the flow of household savings into financial assets.
However, there is an argument that this may be the right time to make the long-demanded changes in the DDT regime. “There are arguments both in favor and against. With stock markets all -time high, we may see some changes”, says Vikas Vasal, National Leader-Tax, Grant Thornton. Industry body CII anticipates a change. “The DDT rate should be reduced to 10% and shareholders should be liable to pay the tax”, said Bidisha Ganguly of CII in its response to the FE Online pre-budget 2018 survey of the economy & markets done before the FM reads out his budget speech.
LTCG and DDT are critical factors. Previously, any speculation that the government is contemplating a tax on long term gains has made market participants wary. It remains to be seen if the government would take advantage of India’s buoyant FDI, FPI inflow position to align both LTCG and DDT with global practices or wait for some more time so as not to spoil the acche-din both for investors and for its ambitious disinvestment program.