Markets tanked on Monday in response to the Budget’s tax proposals, being spooked in particular by the sharp rise in tax incidence for foreign portfolio investors (FPIs) by way of long term capital gains (LTCG) and short term capital gains (STCG). BusinessLine reported on Monday as to how the effective rate of peak LTCG and STCG will be 14.25 per cent and 21.37 per cent, respectively, three percentage points higher than at present. The expected rise in supply of shares following a rise in the mandatory public float requirement added to the adverse sentiment, besides a 20 per cent tax on share buybacks. While SEBI is likely to give companies some time to dilute their holdings, investors are perturbed. The higher surcharge on high income earners will affect FPIs as well. India Inc expected the 25 per cent corporate tax rate to apply to all firms, with the ₹400-crore threshold effectively leaving out the listed entities. The Centre must reduce uncertainties on the LTCG and STCG fronts, keeping in view the prospects of rapid flight of capital to competing bourses. At a time of global market uncertainties on various counts, this move could have been avoided for now. Higher tax on equities may add to the preference for debt over equity flows, with their attendant issues, such as the role of global interest rate movements playing a crucial role. Capital into equities would be based on risk assessments, and can drive economic growth at a time when debt funds in the domestic market have dried up as a result of infirmities in the banking sector and NBFC space. The 2018-19 Budget had seen the reintroduction of LTCG, which had been scrapped in 2004 and replaced by the Securities Transaction Tax. Market players are paying STT, commodity transaction tax and dividend distribution tax, apart from a bevy of levies. A consistent structure would reduce upheavals. With the markets regulator having introduced checks and balances in market behaviour, markets could have done with a breather.
It did not help that global markets were weak on Monday, as strong US jobs data implied that the Fed may not cut rates. This would reduce rate reduction room for India as well. Add to this, the prospect of creeping inflation as a result of higher taxes on petrol and diesel and it becomes clear why optimism was in short supply. In this calendar year, FPIs have ploughed in ₹75,537 crore, bulk of it coming between February and April, ahead of the Lok Sabha elections. But foreign investors have turned wary now, pulling out ₹3,111 crore in July so far.
It is also a fact that, with market valuation being elevated due to poor earnings of listed companies, investors might be booking some profits, now that the Budget uncertainty is over. The regulator need not worry about stock price correction.