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Last Updated : Feb 01, 2020 04:11 PM IST | Source:

No big bang reforms in Budget 2020! Top 5 factors fuelling sell-off in equities

Experts see it as a non-event from a market standpoint as the requirement of the hour was much more compared to what the government delivered.

Indian market witnessed a knee-jerk reaction that pushed Sensex lower by more than 988 points to break below 40,000 levels while Nifty50 ended below 11,700 levels.

Investors lost nearly Rs 3.6 lakh crore of wealth in a single day.

Experts see it as a non-event from a market standpoint as the requirement of the hour was much more compared to what the government delivered.

“Market structure is very weak where it was vulnerable to fall on weak global cues while there was only hope that out-of-the-box Budget could reverse the direction of the market but the budget was in line expectations with disappointing on LTCG front,” Amit Gupta, CO-Founder and CEO, TradingBells told Moneycontrol.

“The market is taking Budget as a non-event and continuing its downfall in tandem with a fall in the global market amid worries of Coronavirus,” he said.

Technically, the Nifty has corrected significantly where it is trading near critical support of 11700 which coincides with its 200-DMA of 11655 where there could be a pullback, suggest experts.

We have collated a list of five factors which could be leading to a sell-off on D-Street according to experts:

No LTCG & STT tweak:

The long term capital gains tax (LTCG) as well as Security Transaction Tax (STT) were not touched by the Finance Minister in the Union Budget 2020.

The re-introduction of LTCG tax in 2018 disincentivizes the equity shareholder who holds for a longer period, and also depresses the flow of money into such an instrument.

Therefore, the abolition of LTCG on equities holds the potential to provide sentiment booster for the equity market, according to experts.

“The government also steered clear of doing away with long term capital gains tax (LTCG) and Securities Transaction Tax (STT) on equity which would have been helpful in aggressively mobilizing household savings towards capital markets,” Dharmesh Kant, Head- Retail Research, IndiaNivesh told Moneycontrol.

DDT still taxed in the hands of recipients:

Abolition of Dividend Distribution Tax (DDT) in the hands of corporates is a positive move but it is still taxed in the hands of recipients.

“I propose to remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT,” Finance Minister said in the Budget speech.

“The dividend shall be taxed only in the hands of the recipients at their applicable rate,” said the speech.

“The income, expenditure and deficit numbers for FY21 are realistic and achievable. Dividend Distribution Tax removal is a positive, but the proposal to now tax dividend at the marginal rate takes some of the sheen off that,” Mihir Vora, Director & Chief Investment Officer, Max Life Insurance told Moneycontrol.

“Taxing dividends in the hand of the investor may have a marginal long-term impact on REIT and InVIT valuations,” he said.

Kuldip Kumar, Leader Personal Tax is of the view that DDT removed but individual taxpayers will need to pay tax on the same

“Those falling in 30% tax bracket will end up paying more taxes as earlier they used to pay no tax on dividend income of upto 10 lacs and companies used to pay 15% DDT only,” he said.

No big spending or stimulus:

The Budget fell short of expectations of giving the intended stimulus which could put the economy back on the high growth path.

“No significant incentives for infrastructure and real estate is a disappointment. The outlay for rural and Agri sectors are less than expectations. The budget reflects the constraints of the sluggish economy within which FM has had to operate,” said Vora of Max Life Insurance.

Measures to boost revenue growth were the main challenge for the government in the face of slackening economic growth, suggest experts.

“The budget 2020-21 outlines the expenditure including higher spending on agriculture and rural development, it has a skipped plan layout for income generation. As a result, India is now facing a widened fiscal deficit at 3.8% for 2019-20 and 3.5% for 2020-21,” said Kant of IndiaNivesh.

Complicated Personal Taxes:

Finance Minister Nirmala Sitharaman introduced new slabs and reduced the tax rate for different slabs for an individual income up to Rs 15 lakh per annum, if a taxpayer opts for foregoing exemptions and deductions.

The new tax regime will be optional and the taxpayers will be given the choice to either remain in the old regime with exemptions and deductions or opt for the new reduced tax rate without those exemptions.

Under the proposal, people with an annual income of Rs 5 lakh to Rs 7.5 lakh will have to pay a reduced tax rate of 10 percent; between Rs 7.5 lakh and Rs 10 lakh: 15 percent; between Rs 10 lakh and 12.5 lakh: 20 percent; between Rs 12.5 lakh and 15 lakh: 25 percent; and above Rs 15 lakh: 30 percent.

“Personal income taxes being cut do not make a substantial difference to consumption, the rich tax which has essentially with surcharges brought the effective tax rates to 42 percent for the highest bracket continues to be a big deterrent to consumption. This is not yielding substantial revenue gains for the government, and it might have been prudent to do away with this,” Nikhil Kamath, Co-founder, Zerodha & True Beacon told Moneycontrol.

Amit Gupta, CO-Founder, and CEO, TradingBells is of the view that some cut in income tax was already expected which cause some immediate positive reaction in some consumption stock but then they witness sell off at higher levels.

“The cut in income tax comes with a rider of giving up exemptions which are also one the reason for disappointment, especially life insurance stocks fell sharply because it is expected that those forgoing exemptions to move to lower tax regimes may not take life insurance,” he said.

Deductions forgone under new tax regime:

In order to simplify the income tax system, Finance Minister has reviewed all the exemptions and deductions which got incorporated in the income tax legislation over the past several decades.

“It was surprising to know that currently more than one hundred exemptions and deductions of different nature are provided in the Income-tax Act. I have removed around 70 of them in the new simplified regime,” Finance Minister said in the Budget speech.

“We will review and rationalize the remaining exemptions and deductions in the coming years with a view to further simplifying the tax system and lowering the tax rate,” she said.

Optional personal tax regime proposed where individuals earning Rs. 15 lac will save 78,000 rs of tax liability on account of changes proposed in the slab and tax rates.

“But, if you are already claiming deduction under 80C or 80D, you might have to evaluate the actual tax savings before opting for the new regime,” said Kumar of Personal Tax.

Asutosh Mishra - Head of Institutional Equity, Ashika Group is of the view that removal of 80C deduction is big negative for the Insurance sector.

“Major part of the insurance product in India is still sold by showing tax benefits to customers. Steps look bit contrary to the Government move to list LIC,” he said.

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First Published on Feb 1, 2020 03:11 pm
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