-By Soumalya Datta
On 23rd July 2024, Nirmala Sitaraman declared her 7th budget, the first budget of the third term of the BJP-led Indian government. The imperativeness and noteworthiness of this “indulgence” to India were validated by the intricate yet deeply discernible consequences that ensued after the announcement of the same. These effects were ubiquitous and varyingly diverse. Now, let`s lend a sentence to project in a very concise fashion what a union budget possesses. The Union Budget serves as the economic blueprint for a country, guiding its economic activities for the year. Alongside outlining the projected revenues and expenditures for the government in that year, it includes various announcements that influence different sectors of the economy. Now one of those sectors that has gotten affected by this humungous event is the capital market of India The Finance Minister has proposed drastic changes in the sphere of capital gains. In this article, I will analytically manifest the possible decisions that can be forecasted to have long-term as well as short-term intricate effects on the Indian capital markets. So, let`s begin by jotting down those “forecasted affecters”.
INTRICATE ANALYSIS OF DECISIONS
Increasing the short-term capital gains tax on these investments from 15% to 20%, and raising the long-term capital gains tax rate from the current 10% to 12.50%. Analyzation: Currently, profits from the sale of listed shares and units of equity-oriented mutual fund schemes held for twelve months or less are classified as short-term capital gains and are taxed at a flat rate of 15% under Section. If these assets are held for more than twelve months, the profits are considered long-term capital gains and are taxed at a flat rate of 10% beyond the initial one lakh, which is tax-free and thus comes to you without any benefit of indexation under Section 112A. The finance minister has kept the holding period requirement unchanged for listed shares and units of equity-oriented schemes to qualify as long-term capital assets but has proposed an increase in the tax rates for both long-term and short-term capital gains on these assets. Additionally, the finance minister has proposed raising the initial tax-free amount of long-term capital gains from one lakh rupees to one lakh twenty-five thousand rupees. Impact: Before the Budget announcement, investors were worried about potential increases in LTCG and STCG taxes. After the finance minister announced these increases, which appear minimal and marginal in the context of the government's revenue, the market reacted sharply for about 10 minutes but quickly recovered. From an investor's perspective, these changes may influence investor behaviour and market dynamics, but the effects are expected to be short-term. I believe that the government intends to make long-term investing more attractive. The government aims to discourage short-term trading activities and encourage investors to commit to long-term investments in financial assets like equities.
The Finance Minister suggested an increase in STT on Futures and Options: Analyzation: The Finance Minister has also proposed raising the STT rates on derivative transactions in equities, commonly referred to as F&O. For options on securities, the STT rate has been increased from 0.0625% to 0.1% of the option premium, which aligns with the rate applied to actual delivery transactions. For securities futures, the STT is proposed to rise from 0.0125% to 0.02% of the trading price of the futures. Impact and intention of implementation: On July 23, Finance Minister Nirmala Sitharaman proposed raising the securities transaction tax (STT) on futures and options (F&O) trading to deter retail investors from engaging in these high-risk instruments. This move follows concerns highlighted in the Economic Survey about the growing interest of retail investors in derivative trading. The survey noted that speculative trading is inappropriate for a developing country and suggested that the surge in retail investor participation in F&O trading may be driven by gambling instincts. Recently, Sebi chief Madhabi Puri Buch also warned investors about taking large positions in F&O. Before that, Ms. Sitharaman and Chief Economic Adviser V. Anantha Nageswaran had highlighted the increasing risks of F&O trading for retail investors. Futures and Options trading is often used as a speculative tool for quick profits in the stock market. However, many retail investors are losing money. A study by the Securities and Exchange Board of India (Sebi) found that 89% of individual traders in the equity F&O segment incurred losses, with an average loss of Rs 1.1 lakh in FY22. All of these can be possible attributes of the decisions. Now, let's move on to forecasted impacts. The increase in STT on Futures and Options (F&O) is relatively small and is unlikely to impact trading volumes in these segments significantly. Overall, these measures are expected to generate additional government revenue. However, the government, exchanges, and regulators might continue to adjust these charges periodically, which could introduce further uncertainty in the markets.
Revisions in the taxation of share buybacks: Analyzation: The finance minister has proposed abolishing the current tax scheme for share buybacks. Instead of companies paying tax on buybacks, the amount received by shareholders will be treated as dividend income and taxed according to the individual's tax slab. Additionally, shareholders will not be able to claim the cost of acquiring these shares or any related expenses against the buyback amount, as it is classified as dividend income. Interpretation of Forecasted impact: The proposed tax changes will negatively impact promoter shareholders in higher tax brackets, who will face significantly higher taxes compared to the company's previous tax burden. Although no deductions will be allowed against the buyback amount treated as dividend income, shareholders can claim a capital loss for the extinguished shares based on their acquisition cost. This loss can offset capital gains for the year and be carried forward if not fully utilized. The new tax regime will also affect small shareholders, who will pay tax on the full buyback amount but may not benefit from the loss on share extinguishment if there are no eligible capital gains. The provisions will apply to buybacks occurring on or after October 1, 2024, potentially leading to fewer buybacks after the new tax rules are implemented.
Scenarios of the 23rd:
The historical day of 23rd July manifested ample dips and highs following the announcement.
Above Chart shows NSE NIFTY on 23rd July
Initially, Indian stock markets reacted sharply, with the NSE Nifty, BSE Sensex each falling by 1%.
(USD Rupee Rate)
The Indian rupee also hit a record low of 83.69 against the US dollar, and gold prices dropped by 5% due to a customs change. However, in the latter part of the day, the indices recovered thanks to improved liquidity.
The Budget may affect stock markets in the short term, markets typically stabilize over the long term. Both the BSE Sensex and NSE Nifty are expected to rise if the economy performs well. Investors in Index Funds generally don’t need to alter their strategy. However, those who actively manage their portfolios should monitor government policies and macroeconomic conditions closely. They should make well-informed decisions based on sector-specific trends.
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