Budget 2018 and Markets: LTCG tax roils BSE Sensex, Nifty

Mumbai: The introduction of the long-feared long-term capital gains, or LTCG, tax on stocks roiled equity markets on budget day. The Sensex closed at 35,906.66, down 0.16%, its worst budget-day performance in the five years of this government. The losses could have been more, said experts, but for the grandfather clause which will exempt gains made before 31 January from the new tax. The new LTCG tax on sale of equities will be applicable on gains exceeding Rs1 lakh. The tax rate is 10%. With this India becomes one of the few countries with multiple taxes on equities. Other taxes include corporate tax on profits, the dividend distribution tax and the securities transaction tax.

“Though the absolute numbers may look less nevertheless this is unfair. Though most of the treaties have been renegotiated there are still some pending and international investors could consider routing their investments from more tax-friendly jurisdictions. Currently there is no provision for loss, but we are sure that subsequent amendments will clarify that,” said Rajesh Gandhi, Partner, Deloitte Haskin and Sells.

Market participants, however, were more sanguine, with analysts saying that the new tax would not deter inflows because of India’s long-term growth prospects.

The tax has been introduced in a fair manner and does not make any difference because the long-term attractiveness of India is still intact, said Nilesh Shah, managing director at Kotak Asset Management Co. However, he added that there are few things that the government could do to plug loopholes such as bonus -stripping and extend time horizons by giving incentives to be an investor rather than a trader. “The unintended consequences of bringing LTCG at 10% is narrowing of gap between short-term capital gains and long term capital gains at 5% which can prompt people to do trading,” he added.

For external investors, however, it does create a hurdle, said Sanjay Mookim, director at Bank of America Merrill Lynch. “The increased equity tax could begin to matter if equity returns faltered. Debt would incrementally look better placed. The LTCG reduces the return expectations from equities by 10%,” he added.

Foreign institutional investors (FII) have been major buyers of Indian shares in recent times. Indeed, local equities have been riding the coat tails of a global stocks rally. FIIs have bought local equities worth $ 2.08 billion so far in 2018. A few analysts said that the LTCG tax will help in arresting irrational exuberance and froth around steep valuation. V.K. Vijayakumar, chief investment strategist at Geojit Financial Services said, “Looking at the positive side, the LTCG tax will avoid irrational exuberance and bubbles forming in the market due to huge capital flows. From the long-term perspective, LTCG is not a major dampener. Equity has delivered more than 15% compounded annual growth rate during the last 38 years. Even if it comes down to 13.5% after 10% LTCG, it is far more attractive than all other asset classes in the long run.” Apart from the tax on equities, the budget also introduced a 10% dividend distribution tax on dividend options of equity schemes to bring them on a par with the growth schemes.

“That may impact flows into funds where investors were primarily entering with the expectation of regular dividends. In fact, dividend schemes are now slightly disadvantaged as opposed to growth schemes as LTCG below Rs1 lakh is exempt from tax,” said Kaustubh Belapurkar, director (research) at Morningstar Investment Adviser India.

The Indian mutual fund industry saw record inflows of Rs1.51 trillion in 2017 and Rs59,482 crore came in through systematic investment plans.livemint