(Is Union Finance Minister Arun Jaitley set for a 'poll vault' in this Budget? Does the Oxfam report on income inequality in India worry him? Is it bye for dividend distribution tax? What will happen to Long Term Capital Gains tax? C J George, Managing Director of Geojit Financial Services, writes exclusively for Onmanorama on what the market expects from this government's last full Budget.)
It's the Budget season again and it has become almost fashionable to know what the market expectations are. This anxiety is not misplaced as the post-Budget stock market reaction will be an indicator of the outcome of the budget on economy as well as markets. This time around, from the Chief Economic Advisor to many financial market experts have already warned the investors of the high valuation multiple particularly in the mid-cap/small-cap space. While acknowledging the warnings from these pundits, it is only prudent to read in between the lines and understand that for valuation to sustain, what the market is looking for is clear-growth in corporate earnings. Nothing more nothing less. If the Budget can indeed become a trigger for earnings growth then the market expectations will be met.
The market wants the government not to deviate from the fiscal deficit target, announced earlier, by all means to avoid negative rating which could result in FPI money going back. Hence, the market wants the government to resist from any populist election-oriented adventure in this Budget. However, there is a political connection to this Budget, as this is the last full Budget before the 2019 polls. And the market also wants this government to continue in power post next elections too for which, the Centre has to announce some people pleasing proposals. So balancing these market expectations will be very difficult for any finance minister. The FM has to address the serious problem of investment in economy to create jobs and hence it is expected that the government will indeed present a Budget that will more or less make the market happy.
The market is worried about any complete U-turn with regard to Long Term Capital Gains tax which has been stable for a long period of time. Any tinkering beyond the change of definition of the period of holding will have serious repercussions in the market. Stock exchanges and brokers are looking for reduction of Securities Transaction Tax which is not likely with the pulls and pressures of an election year.
The other important expectation of the market is the abolition of dividend distribution tax which is natural, as dividend income is taxed twice – in the hands of the company as well as in the hands of recipient. This is expected to go while the revenue loss may be compensated by an increase in tax from the hands of recipients. The most important worry for the market is whether the government will take the cue from the Oxfam report on income inequality in India to impose a very high dose of taxation in whatever means on the rich. This will make the poor who are large in number happy in an election year and the revenue collection will also go up. Such a measure will also get some instant acceptability internationally which the government is very keen on and can even become an election campaign topic.
In India, like many other countries, legal loopholes around the most popular cryptocurrency like Bitocoin has opened a Pandora's box for tax authorities. And this budget is also likely to address this issue, by proposing a heavy tax regime on trading in cryptocurrencies.
