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Budget 2021 | Tweaking tax structure can broaden capital market participation

The Budget should consider providing tax incentives to encourage retail investors to ensure that they stick to their investments.

January 30, 2021 / 12:44 PM IST

This year's Union Budget holds a lot of significance for the country. Not only because it is coming after the coronavirus pandemic ravaged the economy but also because it has the onerous task of putting growth back on track to achieve the target of a $5-trillion economy by 2024. The pandemic, however, has put the government's finances under a severe strain.

While both direct and indirect tax mop-up (including GST) are likely to miss the budgetary targets, the fiscal deficit touched 135 percent of the budgeted target during the April-November period of 2020. Thus, there is very little manoeuvring space for a huge fiscal stimulus, given the high deficit numbers. In this scenario, Finance Minister Nirmala Sitharaman would need to do a fine-balancing act of boosting economic growth while keeping an eye on fiscal prudence.

The government may look at spurring its revenue collections. And, this can be done if the Budget opts for higher public investment through larger outlays for infrastructure, the construction sector and others. This will, in turn, support the growth of many related sectors such as cement, steel, aluminium and financial services. As companies operating in this space see a demand revival, corporate growth will pick up, leading to higher tax payouts to the government.

However, higher outlays towards capital expenditure may push up government borrowing. Therefore, investment in the capital market should be encouraged, which can be the source for raising much-needed equity capital and debt for India Inc.

Boosting retail investor participation


The Sensex recently touched the 50,000-milestone. This shows the optimism among investors about India's growth despite the COVID-induced slowdown. Not only have the equity benchmarks scaled new highs but also the participation of retail investors—especially from tier-2 and 3 cities—has also increased manifold in the last nine months. Therefore, the upcoming budget should consider providing tax incentives to encourage this new class of retail investors to stick to their investments.

To encourage retail investors and make their investment sticky, the budget could consider making dividend income up to Rs 10,000 tax-exempt in the hands of the recipient. Also, classifying dividend income as regular income rather than under 'other income' will reduce the tax outgo and encourage individuals to stick to their investments for the long term.

India is among the few markets where both the securities transaction tax (STT) and long-term capital gains (LTCG) tax are levied. This double taxation is a dampener for investors entering the equity market.

Given the fiscal deficit, it may be difficult for the finance minister to completely let go of the STT due to its revenue potential but a rebate can be considered. The reintroduction of section 88E will allow investors a deduction from gains made from taxable securities transactions. Also, raising the minimum holding period from one year to two for imposing the LTCG tax will likely attract more retail investors.

Reclassification of heads of income

Simple taxation norms always help in raising the tax base through better compliance. However, stock market gains are divided into various heads such as speculative income, business income, short-term capital gains, and long-term capital gains. Tax rates also vary according to the classification. This makes the tax computation cumbersome and complex. Thus, the budget could consider simplifying the categories to just three: business income, long-term capital gain and short-term capital gain.

Tough balancing act

As the Indian economy is projected to contract 7.7 percent in the current financial year, it is imperative to facilitate the growth of the capital market, which will provide much-needed financial resources for corporate India. The government could also consider a fiscal stimulus to kick-start the economic revival.

However, higher spending could stoke inflation, as we have seen after the global financial crisis. The task, therefore, is difficult. The finance minister with her team would need to strike a delicate balance to accomplish the objective.

Disclaimer: The views and investment tips expressed by experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

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Puneet Maheshwari is the Director at Upstox.
first published: Jan 30, 2021 12:44 pm
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