Budget 2017: 5 ways in which Jaitley can spook market

Shishir AsthanaMoneycontrol Research

The sharp run-up of almost 8 percent in the broad indices in the month preceding the Union Budget on February 1 suggests that the market is expecting the moon from Finance Minister Arun Jaitley. With Demonetisation expected to enrich the coffers of the exchequer, everyone will be betting on the FM to provide tax relief for both corporates as well as individuals. Jaitley will also be under pressure to spur job growth through increased government spending. However, let’s not forget, it takes just one announcement from Jaitley to pour cold water over such high hopes.

At Moneycontrol, we present not one, but five such Budget announcements that could potentially spoil the party for many stakeholders. 

1. Market Taxes: Market participants will be glued to their TV screens to listen in for any incremental increase in securities transaction tax (STT) – a tax paid on every transaction. An increase in this tax rate will hit market participants whose grouse is that this levy is applicable even on transactions which don’t earn profits. However, more keenly watched will be changes, if any, in the holding period of shares for long term capital gains (LTCG). Chances are that the FM might increase the period of holding for LTCG to three years. Now, it is one year.
2. Tweaking Tax Rates: In order to reward honest tax payers Jaitley is expected to raise the tax exemption limit to Rs 4-5 lakh per annum from Rs 2.5 lakh. Similarly, corporate tax rates, currently at less than 20 percent, are also likely to see a fall. Jaitley had in his earlier Budget indicated that he was keen on reducing corporate tax rates as well as removing surcharges. Any flipflop on this expectation will be a major blow.
3. Fiscal Deficit Target: Though tax collection is likely to increase on account of demonetisation, Jaitley will have to increase spending at a faster pace which will impact fiscal deficit going forward. After focusing on fiscal deficit in his first Budget Jaitley realised that he had conceded growth in order to meet the fiscal target and please rating agencies. But as rating agencies refused to upgrade India, Jaitley pushed for pro-growth reforms in the following Budget.  In the current year, rating agencies have already hinted that fiscal consolidation is vital for the country’s prospects for a rating upgrade. Markets will not like the FM to apply the brakes only to keep rating agencies in good humour. Though a higher-than-expected fiscal deficit target of around 3 percent will be bad news in the short-run, focus on growth will also be central. It is a tight-rope walk for the FM.
4. GAAR and other 'taxing' issues: Government has been struggling with retrospective taxation and double-taxation issues which have been brought to focus mostly by FIIs. Foreign investors are worried over the time line and retrospective nature of domestic anti-avoidance law or GAAR (General Anti-Avoidance Rules) which will overrule benefits gained under treaties signed with other tax havens. Government on Friday has clarified that there will be no delays in GAAR implementation. Recently, a 'clarification’ by Income Tax Department on the retrospective tax issue confused FIIs even further. Only after a series of reports in the media did the government withdraw the ‘clarification’. Mixing FDIs with FIIs with respect to their holding period led to the confusion. 
5. GST Timeline: GST has been delayed on account of various reasons. Even though the government has now said that most of the contentious issues between Centre and states have been dealt with, many stakeholders believe that the infrastructure on the ground is not in place and will take more time. GST has to be implemented before September 16, 2017 in accordance with Section 19 of the 101^st Constitution Amendment Act, 2016 which requires replacement of existing taxes by GST. Any delays from the July 2017 deadline will be cutting it too thin. Market will like a firm timeline on the implementation.