In his first budget speech as finance minister in 2014, Arun Jaitley had voiced his government’s resolve to stoke investment and kick-start demand. It would be fair to say that in his last budget as finance minister before general elections in 2019, he has firmly shut the lid on that aspiration. A combination of what he did and what he didn’t in Budget 2018 has dashed any hopes investors and companies may have had.
His act of commission, one that is likely to hurt the growing investor community in the country, is of course the re-introduction of a long term capital gains (LTCG) tax at the rate of 10%, a tax made even more usurious by the absence of indexation benefit, along with a distribution tax on equity mutual funds. Compounding that of course was leaving the securities transaction tax (STT) on listed shares and the dividend distribution tax in place.
Sure, the finance minister needed to find money to fund some of the ambitious rural infrastructure schemes he announced in the first part of his budget speech. With elections around the corner, these were politically essential. But for investors who had, since demonetisation, turned to financial assets, this is a triple whammy. As it stands they will now be paying a plethora of taxes on their investment in the shares of a company. First there is the corporate tax already paid by the company, then the dividend distribution tax, STT when they buy the stock and now an LTCG tax on exit from those investments. That should certainly cool down domestic flows into the market apart from closing down the options for investors.
There was more bad news for companies though and this time it was in the form of Jaitley’s refusal to look at some reduction in the corporate tax rates. To add insult to injury, the hike in the applicable cess from 3% to 4% would translate into an increase of a further 0.34% in the tax rate for larger companies.
Coming as it did against the backdrop of accelerating inflation, rising crude oil prices and widening fiscal deficit, it is likely to make companies even more cautious in planning fresh investments.
The expectations of a corporate tax cut were not unreasonable since countries across the world will now be looking to rationalize them after the US laid down the marker in that direction. In December, US President Donald Trump signed the Tax Cuts and Jobs Act, effectively slashing the corporate tax rate from 35% to 21%, a 78-year-low. Simultaneously, the Act allowed American companies to repatriate the $2.6 trillion they hold in cash stockpiles abroad by paying a one-time tax rate of 15.5% on cash and 8% on equipment. Already, Apple Inc. has announced that it expects to invest over $30 billion in capital expenditure in the US over the next five years while creating over 20,000 new jobs.
Following Trump’s move, the South China Morning Post commented: “The most significant tax cut in three decades in the US may trigger a global race to slash taxes to compete for capital.” Back home, a day after presenting the Economic Survey, the government’s chief economic adviser Arvind Subramanian had warned that India couldn’t afford to ignore the US move if it wanted to have investor-friendly policies.
If the finance minister decided to ignore these warnings, it can only mean that either the government has given up hopes of getting the private sector to loosen its purse strings or as the LTCG seems to hint, it has decided that the rich should pay more simply because they are rich. While that may certainly provide the right optics in a pre-election year when the clamour is about the small minority that is cornering the vast majority of national income, it leaves the small matter of desperately-needed capital investment unaddressed.livemint