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What Does Full Budget 2019 Holds For Investors!


Posted on 21-Jun-2019 Comments  0

Budget Wish List

What are equity markets expecting from the Full Budget 2019

The one segment of the economy that is most excited by the Union Budget each year is the capital market. What are the key expectations of the markets from the Union Budget 2019?

Enough of LTCG tax

Budget 2018 introduced the 10% tax on long term capital gains on equities and equity funds. In the last year, it hardly resulted in any worthwhile revenues. On the contrary, it has taken away the attractiveness of equities for investors looking to create wealth. Considering that the STT was introduced in 2004 in lieu of the LTCG tax on equities, it is only logical that this LTCG tax is scrapped. The STT is already doing a good job of generating nearly $1.2 billion for the government and the LTCG tax only has nuisance value.

Time to free dividends

In India, dividends get taxed at multiple levels. Despite being a post-tax appropriation, dividends are subject to DDT and also to tax in the hands of the investor for annual dividends above Rs.10 lakhs. This makes dividend more tax heavy than interest and is in fact inducing companies to resort to buy backs just to save the tax incidence of dividends. To begin with, the budget can look to make dividends on equity funds free of DDT. That will, at least, not throw long term financial plans off tangent for majority of investors.

Rationalize transaction tax

For a moment let us cover the transactions on all segments viz. equity, derivatives and commodities.  Currently, equities and F&O transactions are subjected to STT while all commodity transactions are subjected to CTT. In a market where traders are the backbone when it comes to creating liquidity and depth in the markets, this STT and CTT are literally driving away the short term traders. Of course, STT is a resource generator and they may not be keen to get rid of it. However, they can make a start by scrapping CTT on commodities transactions since that is still a nascent market. Also, the STT on intraday transactions can be scrapped to make markets more liquid.

Keep the FPIs happy

The Indian markets are still largely driven by FPIs as they influence equity prices and the currency value. Firstly, FPIs prefer fiscal responsibility targets to be met. Constantly pushing the goal post does not go down well with serious FPIs. Secondly, the issue of taxation of FPIs and the hounding of P-Notes still continues. It is time the government uses the budget platform to come out with a white paper on FPIs and give them comfort on the tax and the P-Note front. India needs FPIs to give robustness and depth to the markets. Taking care of FPIs will be like hitting two birds with one stone!

Budget Wish List

What are the budget expectations on the Direct Taxation front?

No budget discussion is really complete unless you look at the personal taxation aspects. From limits to exemptions to rebates, this is a major area that gets influenced by the Union Budget. Here is the bucket list.

Rationalize tax slabs further

In the interim budget 2019, the FM did not touch the income slabs. Instead, for all individuals earning a net income of up to Rs.5 lakh, the tax liability was given back to them as a rebate. This can still be unfair to individuals whose income is slightly above Rs.5 lakhs as they end up paying a steep tax. Rather, the government can make income up to Rs.5 lakh fully exempt and enhance standard deduction to Rs.1 lakh giving a huge relief to small tax payers.

Make exemptions realistic

One issue with the tax exemption limits is that they are out of sync with the real world. Take Section 80C. The limit has been at Rs.1.50 lakhs for more than 18 years while list of eligible investments has been expanded. This limit must be enhanced, at least, to Rs.3 lakh so that individuals can actually benefit from planning their taxes and also encourage investments in the process. The Budget also needs to look at Section 24 for interest paid on home loan. The Rs.2 lakh limit must stand enhanced to Rs.4 lakh with immediate effect so that it reflects realty prices in India.

Cut down the process time

The budget must really do a rethink on the process front. A lot of time and effort is being spent by the tax department without any concomitant benefits. For example, there is no need for people above Rs.2.50 lakhs to file returns. The Form 16 or Form 26AS should be good enough. Only individuals earning above Rs.5 lakhs should be asked to file returns and that saves a lot of time and effort and enables officers to focus on the more important issues. An increase in the number of returns does not really add any value if the income tax revenues are not growing. The focus should be more on tax efficiency rather than on numbers.

Time to cut corporate taxes

Former finance minister, Arun Jaitley, had promised to cut corporate tax rates from 30% to 25%. However, this benefit was subsequently restricted only to companies with total turnover of less than Rs.250 crore. Indian companies still pay too much tax and that is having an impact on performance. The bare minimum that the government must do is to scale down the tax rates by 5% and also cut MAT rates proportionately.  If required, the government can do away with most of the non-merit exemptions so that the structure gets largely simplified. As India Inc struggles to get profits back, this tax cut could come as a blessing in disguise!

Budget Wish List

What are mutual funds expecting from the Union Budget 2019

Mutual funds may have been in the news for all the wrong reasons in the last one year. From FMP delays to sharp falls in the NAV, debt funds have become the new source of risk. At the same time, MF collections continue to be robust. Here is what budget can do!

Time for MF reforms

The government deadline to push MF reforms has come and the budget should be the platform. Mutual funds manage Rs.25 trillion and they are now systemically important. From regulating the portfolio of liquid funds to making AMCs accountable to making these mutual funds subject to more stringent regulation; should be announced in this budget. It is time not to put the trust on trial any longer. 

Giving an equity push to MFs

Over the last few years, ELSS schemes have emerged as an important tax saving instrument for the young and first time equity investors. The budget can look to carve out a separate limit of Rs.1 lakh into the Section 80C basket for ELSS alone. This will be a big incentive for ELSS investors and also catalyze the equity cult in India. The 3 year lock in period anyways instills a long term view in the investors. The government can also create an intermediate category with a shorter holding period but a lower level of tax exemption. This can bring in a larger MF equity cult.

Remove the tax anomalies

One of the attractions of equity funds in the long run is the post tax returns. The flat LTCG tax without indexation is bad enough. In addition, the dividends on equity funds are also now being subjected to 10% DDT. Both should be scrapped immediately as mutual funds are the genuine long term planning products. It puts an unnecessary burden on the investor and creates an uncertain tax environment. In addition, budget should also look to revive the Section 54E exemptions for mutual funds which pertained to reinvestment of capital gains. These can give good buy points for mutual funds as an asset class.

Address systemic issues

It is time for the budget to address a lot of systemic issues. With AUM of Rs.25 trillion, it is too big. There are three broad areas. Firstly, mutual funds must be given more investment freedom. Let the fund invest in equity, derivatives, commodities and structures within well defined parameters. Secondly, put greater onus on the board of trustees to escalate issues of importance to the small investor. Lastly, make mutual funds accountable at multiple levels. If banks can bear the cross of wrong decisions then why not fund managers. While investment decisions can be right or wrong, cases like investing FMP money in private NCDs is crazy. The budget must nip this in the bud.

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