The Budget for 2020 is just two weeks away. As usual, many big names have voiced their expectations from this annual exercise by the Union finance minister (FM).
Economic growth has taken a beating over the past two years because of subdued demand, poor consumption trends, lower private investments and liquidity issues leading to a severe credit crunch. To counter the slowdown, the Narendra Modi government of late has taken a string of measures. Any revival is expected from FY21 onwards.
When it comes to the stock market, the previous two years saw a split down the middle. While a few large caps ran the show, the broader market languished, affecting retail investors to the hilt.
A few factors were at work. The imposition of LTCG (long-term capital gains tax) in Budget 2018 followed by other regulations -- reorganisation of mutual fund schemes, unexpected segregation of companies as part of the ASM (Additional Surveillance Measures) list, abruptly disallowing brokers from providing intraday leverage -- has upset all calculations of brokerages, fund managers, investors and traders alike.
To be fair, some regulations were required, but the rest dampened the mood. These frequent disruptions came at a time when many listed companies suffered from credit crunch, poor business prospects and higher valuations, thus worsening an already shaky conditions. With many well-known large companies defaulting on their debt obligations, small and mid caps suffered from severe collateral damage. This resulted in erosion of investor interest in stocks other than the top 50 or a few select mutual fund schemes.
Between November 2019 and January 2020, over nine weeks, the frontline Nifty scaled fresh highs 15 times. During the first two weeks of January, the stock market performance was broad-based and generated quite a bit of investor interest, especially in small and mid caps. It is imperative that the Budget 2020 carries forward this momentum and provides the right impetus for a wider involvement of market participants.
A long-pending demand from the stakeholders is either a reduction or elimination of STT (Securities Transaction Tax) and CTT (Commodities Transaction Tax). The transaction costs in India are still too high, which act as a deterrent to participation. As STT mop-up is linked to the state of the stock market, any reduction or abolishment for a year or two can help improve trading volumes tremendously, and thus collections.
Levies for investors cover a diverse bouquet of taxes, which include GST on brokerage, exchange transaction charges, clearing fees and the like. With the Securities and Exchange Board of India (SEBI) disallowing brokers from providing intraday leverage to traders, the impact cost has gone up.
Another point to note is the non-uniform stamp duty levied across states. In addition, Long-Term Capital Gains (LTCG) tax kicked in since the Budget 2018.
To create positive vibes, the government, therefore, needs to go back to its quiver of SOPs (standard operating procedures) and weigh the following proposals.
- Removal of LTCG completely or making LTCG equal to zero after a 2-year holding period.
- Considerable reduction in STT/CTT to provide a boost to the trading community.
- Enforcing uniform stamp duty across all states, and reduce it by half for a meaningful impact.
- Exempting dividends from taxation up to a limit of at least Rs 2.5 lakh.
One or more of these proposals, if implemented, will have a positive rub-off on stocks, reduce transaction costs, increase participation and thereby boost tax collections. Though there are suggestions for a reduction in personal tax rates, which could also spur investment and consumer spending, it all depends on the quantum of cut the finance minister is willing to make this time, given the fact that a revamped Direct Tax Code (DTC) is in the offing.
The Budget expectations are high and varied, with many sectors seeking support to bolster business and consumer confidence. On the other hand, the government is fiscally constrained, hemmed in by comparatively lower tax revenues. But the challenge to turn around the economy remains. In this scenario, we expect the finance minister to loosen the purse strings a little, at the cost of expanding the fiscal deficit by 0.3-0.5 percent, and lend a hand to all sections of the economy, including traders and investors.
The path to $5 trillion economy by 2024 is shaken but not lost out. It is up to the FM and the Prime Minister to formulate and implement appropriate measures to put the economy back on track with all engines of economy firing on all cylinders.Tejas Khoday is Co-founder and CEO, FYERS. Views are personal.