(C J George, Managing Director of Geojit Financial Services, writes exclusively for Onmanorama on this year's Budget.)
The government's fifth and last full Budget was delivered by the finance minister amid subdued economic growth, challenging fiscal situation, farm distress and higher unemployment rate. As expected the budget turned out to be an election eve budget going by the massive outlays for social sector.
Capital market investors undoubtedly got a raw deal from this budget. The re-introduction of LTCG tax with a rate of 10 per cent for all such gains over Rs 1 lakh on equity and equity MFs looks modest, but the arguments against such a tax articulated by FM is flawed in terms of policy making. Several countries have tried this exemption in the past for promoting risk capital in the economy and thus incentivise investments. In developing countries, there is a tendency to save money in fixed income investments and unproductive assets like gold and real estate. Long-term capital gains were made tax exempt in the 2004 budget to encourage savers to channelize their investment into corporates which leads to job generation and economic growth. Hence the FMs argument that businesses are not investing their surplus back into the business and that they have been investing in equity assets, because of this exemption is not necessarily tenable. An investment by a corporate in the equity of another company although indirectly can lead to investment in business. This exemption should have been at least given to IPOs so that investment in new projects could have been at least encouraged. The other argument of the FM is that equity returns have been high even without an exemption and hence imposition of tax on LTCG is justified is questionable on the grounds that equity returns are the most volatile of all investments. Next year if the returns are negative will the FM roll this tax back? Very unlikely. This might rather be the beginning with 10 per cent !
The equity MF inflows into the market has been going up significantly in the recent past and undoubtedly the retail investors have been looking at this LTCG tax exemption as a major advantage . The IFAs and other distributors have been distributing equity MFs with this as the main USP and that has resulted in record inflows into equity MFs. Such retail inflows into domestic MFs helped Indian markets gain stability at times when foreign investors sold stocks in a big way last year. In the past, market used to go down when FPIs sold but these days’ retail equity inflows helped Indian DFIs to gain better control on Indian stock market. If retail investors lose interest in MFs Indian stock market will once again become a slave of foreign investors which is not in our best interest.
In fact this ‘modest’ Rs 20000 crore additional revenue from this measure could have been better foregone for the stability of Indian stock market. It would have been better to take advantages rather than spoiling the party !
The 10 per cent dividend distribution tax on equity MF is another retrograde step for the market as this will affect the return on equity MF investments. While it is true that such a move will remove disparity between equity MF and debt MF the risk capital factor in equity MF is overlooked grossly which is not in the long term growth demands of the economy.
Positive announcement in this budget for the market is the proposal to SEBI to mandate that 25 per cent of all borrowings of large companies should be through the bond market. This will help to create vibrant bond market on the one hand and will lead to development of another asset class for retail investors on the other hand. For the last many years annual budgets contained one announcement or the other for development of retail debt market and nothing has happened. This time for a change there is a concrete proposal which if SEBI implements finally retail debt market will take off. Although the details are not available, the proposal to set up a gold exchange is positive step for investors. It is also announced that the hassles of investing through gold deposits will be removed which again is a welcome suggestion.
On the taxation front the proposal not to treat profit from trading of agricultural commodities derivatives as speculative income will help the growth of agri-derivative business. The lowering of corporate tax rate from 30 per cent to 25 per cent for companies having a turnover of less than Rs 250 crore will benefit the Mid-cap and small cap segment of the market. The market is a bit disappointed as the offer from the FM in the first budget of this government was to reduce the corporate income tax rate to 25 per cent across the board by the end of the term.
