Changes in STT, LTCG, STCG will be forgotten quickly, focus to shift on US Presidential election

Whatever be the impact of these changes in the tax structure, the market is going to forget this budget in next two-three days.

Changes as envisaged in the Budget by the finance minister Nirmala Sitharaman in the Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) does not fundamentally impact the pricing of the stocks. The price of the stock is determined by various other factors like topline, net profit, earnings level and such other accounting related matters. From the valuation perspective, the change in STCG or LTCG is not a determining factor in pricing of the stock but yes, the change in these tax structure will have a negative impact on the market sentiment. Market doesn’t like negative surprises. The change in rate structure was a negative surprise for the market to an extent that the marginal hike in tax rates has become a mood spoiler. The only impact it will have is sentimental in nature and not economical/fundamental in nature.

One may argue that the hike in LTCG from 10 percent to 12.5 percent is a hike of 25 percent, but if you see the overall scheme of the things, it is just a marginal. If an investor has LTCG of Rs 1 Lakh earlier, he had to pay Rs 10,000 in tax but now onwards he will have to pay Rs 12,500, fishing out additional Rs 2,500. I will call it as a sentimental impact and consider it as sentimental negative.

As far as STCG is concerned, it will impact the short-term trading behaviour of the investor and will reduce the horizon of the investor to look at the market from the short-term point of view. According to me, this is a step in the right direction. Now the STCG rates have been increased from 15 percent to 20 percent. Investors will be disincentivised to invest in short term and will be incentivised to stay invested for a longer period of time. The arbitrage between the STCG and LTCG has gone up. Initially, the STCG was 15 percent and the LTCG was 10 percent with a arbitrage of 5 percent but now with the rates being hiked, the arbitrage has gone up to 7.5 percent. With these changes, the Government has sent signals to the market that it wants investors to stay in the market with a longer-term horizon and discourage those investors having short-term view on the market. I think this move by the Government is in favour of market, capital formation and for overall stability of the market.

As far as changes in Securities Transaction Tax (STT) is concerned, it was on expected lines as the Economic Survey presented on Monday had raised concerns related to the Futures & Options (F&O) trading and already indicated some action on this front. The government has used hike in STT as a tool to rein in the excessive that it felt were present in the F&O segment. The STT has gone up by 60 percent and there will be some impact on the trading volume in the segment. Again, there is no change in the fundamentals of the businesses here as well but we expect the volumes in the Derivatives may go down by 10-15 percent because of these changes.

Whatever be the impact of these changes in the tax structure, the market is going to forget this budget in next two-three days. From the beginning of the August, entire focus of the market will move towards the largest event, that is lined up at the end of this calendar year, the US Presidential election. Two parties participating in the US election; the Democrats and the Republicans have diverse thought process on issues ranging like the direction of the US economy, the direction of Global relationships, Tariffs etc. A lot of things will change depending on whether the Democrats retain the power or Republican succeeds in ousting the incumbent Government. Markets will be keenly watching these events and it will rotate and prepare itself in the direction in which it seems the outcome is going.

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