Budget Increases Taxes To Curtail Speculation In The Stock Markets
The rupee slipped to record lows on Tuesday as the government raising tax rates for capital gains from equity investments and on equity derivative trades hurt market sentiment
On Episode 346 of The Core Report, financial journalist Govindraj Ethiraj talks to Uday Ved, partner at KNAV & Co.
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SHOW NOTES
(00:31) The Take
(07:47) The Stock Markets Seesaw And Settle Down
(08:59) Rupee Hits Fresh Record Low
(09:43) Takeaways From the Union Budget 2024 with Tax Expert Uday Ved
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
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Good morning, it's Wednesday, the 24th of July and this is Govindraj Ethiraj headquartered and broadcasting and streaming from Mumbai but right now in transit.
A fresh heads up, I am travelling for a conference and thus will be intermittent or have short episodes for the next few days.
The TAKE
The big expectation from an Union Budget exercise is when you feel your wallet feels heavier for now or your hopes are raised for the future.
Hopes could include getting a job, better jobs, health, education, for oneself and the family and of course a house that one can call one’s own.
Measuring any Government’s performance, including through the instrument of the Union Budget 2024 that was presented yesterday should be done through these lenses.
Macro economic policy must eventually serve these interests. Greater competition induces better products and services, a stable and low intensity tax regime ensures businesses small and big focuses on creating value and building enterprises rather than battling it out in tax courts.
And infrastructure, physical and social, must grow to support this.
In this context, there is nothing so major in the Budget that can transform our lives from tomorrow and nor should one expect such moves.
As always, look for the several small steps forward and some backward and see where it adds up.
On the physical side, the Government has said it will spend a record 11.11 trillion rupees ($132.85 billion) on infrastructure in the financial year ending March 2025 to support growth and create more jobs.
The spending plan was unchanged from the interim budget presented in February before the national elections.
The infra push will continue to spur growth as it has before though the question is private investment.
Which as always needs not just incentives but clarity in policy and laws.
We talked of the Angel Tax or Section 56 of the Income Tax Act which taxes investments into companies by classifying them as income, a situation that quite surely does not exist anywhere else in the world.
And India had it and it flourished and thousands of companies were terrorised for the best part of 12 years.
We said yesterday that the Angel Tax should be thrown out and not made more complex.
The Government has done that.
This also tells you that it is easy to pass laws but getting them out takes years and mind numbing effort. Angel Tax is a case by the way where the Finance Minister in successive budgets has said they were doing away with it.
Even now, I would wait to see if the whole section goes and does not crop up in another part of the Income Tax Act under a new name.
Speaking of throwing out taxes, another tax that should have gone is the Tax Collected at Source for overseas spends. Earlier, the tax could only be claimed back at the end of the year. The Government is now allowing your employer to adjust the TCS against the tax deducted at source that you pay from your salary.
So if you incurred Rs 100 as TCS, and your TDS from your salary is Rs 500 for that month, then the employer will only pay Rs 400 and the rest comes back to you as salary.
I don’t know if this will work as advertised. Let's see.
At a very broad level, I would surely have some quibbles but the undertone I am seeing with the Economic Survey and now the Union Budget, is that the establishment is listening a little more than before.
Perhaps that reflects the changed political mix with the BJP no longer in absolute majority, perhaps it's a realisation and evolution that consultation and listening is critical to policy making.
The outcome is obviously welcome and positive.
That the Government was going to tinker with long and short term capital gains for sale of assets was quite evident including from the steady briefings to various economists who in turn put out their assessments. Nothing wrong in that, unless you were the economist who did not get the briefing.
I would rather see the imposition of taxes, including higher STT and capital gains as moves to cool an overheated market and of course encourage longer term investments.
The increase in short term capital gains tax on equities from 15 to 20% is a good move. Similarly long term capital gains, if you sell beyond a year, have been increased from 10% to 12.5%.
My general sense is that such taxes keep changing and nothing is permanent. Tomorrow, if for some reason, interest in equity markets begins to dwindle, then the Government could be incentivised to lower them. Or for some other rationalisation reason.
We touched on jobs and aspirations.
There are some new ideas here, including to provide incentives to individuals who join the workforce and to companies who create these jobs.
A nationwide internship programme to provide internships to 10 million youth in the next 5 years with the top 100 companies is good. The cost of the internship, including stipends, is to be borne by the companies from their CSR funds.
Put differently, the Government is expanding the ambit of your CSR budget which many companies struggle to put good use to.
On the other hand, managing a flow of interns into companies takes effort and additional infrastructure so I would like to see how companies react once they finish giving their wholesome praise to the Budget as they usually do.
On the other hand, I subscribe to the idea of internships and can see many colleges directing their students to spend time in organisations in the last few years.
A CV with an internship looks stronger than one without.
The Government is also incentivising companies and manufacturing companies by providing a month’s wage to employees entering the workforce in all formal sectors. The rub of course is formal because that only represents less than 7% of the workforce.
It's a start nevertheless.
The scheme would see a month’s salary upto Rs 15,000 in three instalments to first time employees as registered with the employee provident fund organisation, the Governments’ proxy for also measuring formal job creation.
The question I would of course pose is how does a manufacturing company see it from their perspective. It reduces the wage bill potentially at start but is that enough to expand capacity alone ? Not sure but we will explore this in coming days as it does merit discussion.
A lot of the other actions including cutting import duties only benefit us and make manufacturing for exports more competitive or are in response to not so well thought through actions earlier, like the reduction of customs duties on gold.
It was evident that the increase in customs duties on gold had dramatically increased smuggling, as it always happened and there was no new insight that indicated otherwise.
We need lower import tariffs to become more competitive, there is no way around it.
And we can’t dump all our problems on the Central Government and Budgets like this. Just saying.
The StockMarkets Chew On Government Proposals
The Stock Markets shares ended a see-saw session lower on Tuesday, as the jump in consumer stocks on the budget promise of higher rural spending couldn't help the market fully pull back from a slide after a hike in the taxes on equity trading, Reuters reported.
The NSE Nifty 50 ended 0.12% lower at 24,479.05, while the S&P BSE Sensex settled 0.09% lower at 80,429.04.
The day itself predictably was volatile.
While the markets seem to have taken in the announcement of higher capital gains tax somewhat bravely, the real impact of that move may take a few more days to play out.
Consumer stocks like HUL did well but the biggest drag was Larsen & Toubro, falling 3.1% after the government did not increase the amount it planned to spend on infrastructure. The spend levels are high of course but the markets expected higher. Other infrastructure stocks also fell.
Realty stocks reversed early gains to slide 2.3% after the government removed the indexation effect on property sales, which effectively means a higher sales tax.
Rupee hits fresh record low
Meanwhile, the Indian rupee slipped to record lows on Tuesday as the government raising tax rates for capital gains from equity investments and on equity derivative trades hurt market sentiment.
The rupee ended slightly lower against the U.S. dollar at 83.6875, its weakest ever closing, after having slipped to a record low of 83.7150 earlier in the session.
Broadly, as an outlook for markets and companies, it does not seem like the Budget changes anything dramatically.
The growth drivers for most companies were in place before the Budget and will continue to be the case.
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