Govt should remove tax on capital gains when switching between MF schemes: Edelweiss Wealth

There is no tax when an investor switches from one fund to another in ULIP, a pension plan or NPS, but in case of mutual funds, switching from one scheme to another is treated as a sale transaction and could lead to taxable capital gains, Vinay Khattar, Head Research, Edelweiss Wealth Management, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:
What are your expectations from the upcoming Budget?

We all hope that the government will make it count. Not opting for an expenditure cut is a priority. The Reserve Bank of India (RBI) in its last MPC minutes highlighted the need for fiscal action in play.

The government should go counter cyclical. Even in the past instance of 2008-09, higher government expenditure had helped revive growth trajectory.

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The government could focus on creating demand. And, that could go a long way in reviving the economic activity. Whether it is incentive through a tax cut for buying houses to income tax or GST cuts there are multiple options that the govt can choose from to revive demand.

Do you think Govt. will be able to meet this fiscal deficit target?

We expect the government will miss fiscal deficit by ~50bps of which ~12bps comes solely with nominal GDP growing slower than expected.

I think this is the number which markets have already baked in. In the current times of slowdown, markets will react more positively to fiscal slippage with expenditure intact than to “creative” fiscal consolidation.

Which sectors are likely to hog the limelight in this Budget 2020 and why?

India has seen most pain in consumption space, especially automobiles in the year gone by. This budget could mark the introduction of scrappage policy, further subsidies on EV and could also reduce GST rates on two-wheelers and smaller cars.

In the case of much talked about Personal Income Tax cut, an increase in disposable income will drive the consumption up further. Rural wages have been subdued for far too long and PM KISAN has been running behind schedule.

Therefore, some form of consumption boost is very much possible. The fact that CAPEX needs a boost cannot be denied with FY20 investments expected to grow at meagre 1 percent. This could largely be infra focused.

Do you think infrastructure could turn out to be a strong beneficiary in the upcoming Budget?  

The government’s ambitious 102 lakh cr worth of National Infrastructure Pipeline (NIP), which was unveiled at the end of 2019, has reinstated this regime’s focus on infrastructure spending.

This program aims to upgrade India’s infrastructure positioning in global markets and initiate a virtuous cycle of higher investments, growth and employment generation in the economy.

As against 80 lakh cr infrastructure spending between FY08-19, NIP plans to spend 102 lakh cr between FY20-25E, which we believe bodes very well for the sector.

As 39 percent of this plan is to be funded by Centre, we expect budgetary and IEBR allocations for sectors like road, railways, affordable housing, etc to be a key monitorable in this budget.

What are the expectations from Budget 2020 from investors or market perspective?

Removal of Tax on Capital Gains on switching between MF schemes:

There is no tax when an investor switches from one fund to another in ULIP, a pension plan or NPS. However, in case of mutual funds, switching from one scheme to another is treated as a sale transaction and could lead to taxable capital gains.

Removal of dividend distribution tax:

Currently, the company pays corporate tax, then DDT and then dividends received above 10 lakhs is again taxed at the hands of the shareholder.

Market participants expect a relaxation in this triple taxation. If corporates save on DDT, they can use it for capital formation which will then increase the elbow room for corporates to undertake support larger capex budgets.

LTCG:

There is an expectation of the Long-Term Capital Gains Tax being rolled back or increase the exemption limit from the current INR 1 lakh

The govt struggled to meet the divestment target in FY20. What are the estimates you are factoring in for the next fiscal?

Until November, GoI has only executed INR 18K cr of the budgeted INR 1.05 lakh cr, despite some major announcements. I believe BPCL will be a big mover.

If it doesn’t get divested this year, it will contribute heavily to next year's revenue. In that case, next fiscal also GOI will bet on high divestment proceeds of ~ INR 1.2 lakh cr

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