As Union Finance Minister Nirmala Sitharaman unveiled Part B of her Budget speech where she announced the new taxation system for individuals, shifting of dividend distribution tax from companies to individuals, and no relief on long-term capital gains tax on equity investments, the benchmark Sensex at the BSE fell sharply by 2.4 per cent — the biggest Budget day fall since Pranab Mukherjee’s Budget in July 2009.
The benchmark Sensex fell 1092 points intra-day and closed 988 points down at 39,735.53. The broader Nifty at the National Stock Exchange fell 2.5 per cent to close at 11,661.
At a time when the economy is facing a major slowdown and the GDP growth rate for the second quarter FY’20 plunged to 4.5 per cent, stock market participants stood disappointed as many feel that the budget lacks on providing a visible roadmap for revival of the economy.
“Since the budget was being presented at a time when there was general acknowledgement by the government that there has been a slowdown, there was expectation that they would come out with strong steps to revive growth. However, that is missing and hence the market has reacted negatively,” said CJ George, MD, Geojit Financial Services.
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He further said that the announcement on dividend distribution tax will lead to an overall reduction in dividend announcement by companies. “Private sector companies in India are run by promoters and most of them get dividends that fall in the highest tax bracket. While tax outgo on dividend till now was 10 per cent, it will now shoot to around 43 per cent and this will lead to a scenario where companies will not announce dividends,” said George.
Analysts say this might change the dividend culture of many companies, impacting the private sector investment which has been very sluggish for the last few years.
There are others who also feel that dividend distribution tax at the hands of individuals is a big negative. Nirmal Jain, Founder & chairman of IIF, said: ”DDT has been abolished and, therefore, obviously foreign investors will benefit but then it becomes fully taxable in the hands of shareholders which is not the right way of doing it because shareholders are also owners and as owners of the company they pay tax on profits and it gets taxed again.”
Another factor that has dented market sentiment is the government’s move to offer a new tax system where the deduction under Section 80C has been withdrawn. “Investors invest in tax saving mutual fund schemes and also in many insurance shames that qualify for benefits under Section 80C. While the finance minister has said that gradually all deductions and exemptions will go, it means that domestic institutions will find it tough to pool investment by investors and this could dent inflow into the stock markets,” said a market expert.
So, the alternative provided to individuals for lower rate of tax, provided they do not claim exemptions/deductions, did not seem too attractive. The alternative tax system discourages investments which market participants do not seem to be comfortable with.
Markets were eagerly hoping for a correction in the Long Term Capital Gains Tax (LTCG) which the FM silently ignored. LTCG on returns in equity mutual funds are treated as long term capital gains and taxed at 10 per cent on gains of over Rs 1 lakh in a financial year. Mutual funds were lobbying for the removal of LTCG on equity, which was introduced by Arun Jaitley in 2016.
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The hike in deposit insurance cover also led to selling in bank stocks. “Most importantly, the fall in the Bank Nifty due to the additional burden on the banking sector due to five times hike in the deposit insurance costs, up to Rs 5 lakh per depositor. There are no clear policy measures as regards the banking sector is concerned, except that they are encouraged to raised borrowing from the market for additional capitalization,” said H K Pradhan, Professor of Finance and Economics, Xavier School of Management (XLRI).
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