Budget 2008-09 could trigger a fresh round of negativism in the short term in the stock markets, which are already under severe pressure in the wake of the global meltdown.
While there was no visible fresh impetus, barring pharmaceuticals, automobile and small and medium enterprise, provided to the corporate sector in terms of withdrawal of surcharge or a reduction in taxes, the budget has some teasers for the Indian capital market and commodities market.
Although long-term sentiments would continue to be driven by the Indian Inc growth story and global sentiment as far as capital flows are concerned, experts feel that the short-term volatility would increase because of certain measures proposed in the budget.
“I wish the government would have done something more for the capital market,’ said Hemendra Kothari, chairman, DCP Merrill Lynch India.
The budget has proposed to hike the short-term capital gains tax, imposed service tax on unit linked insurance plans, withdraws benefits under Section 88 E for Securities Transaction Tax (STT) and brings commodities trading into the STT.
This is a market neutral budget, said Vijayan Krishnamurthy, CEO of JP Morgan Mutual Funds. There are some boosters for sectors such as infrastructure, pharma and automobile, he said. The hike in the short-term capital gains tax to 15 per cent from 10 per cent would trigger fresh selling at least till Mach 31, 2008 as many short term investors would book profits before March 31 to avoid its applicability. However, in the longer term this would bring stability in the stock markets by weeding out speculators from the market.
The withdrawal of benefits under Section 88 E for STT would effectively increase the tax obligation of investors. Under the existing norms of 88E, the amount of STT paid was deductible from the total tax obligation. Under the proposed norms, the amount of STT paid can be deducted from taxable income. The changes in the STT would result into a sharp reduction of arbitrage volume, said S.P. Tulsian, a leading stock market analyst and investment advisor.
This effectively means that if someone paid Rs 100 as STT and at the end of the year his total tax obligation is Rs 1,000, he would have withdrawn Rs 100 and paid a net net of Rs 900. Under the new schemes, this Rs 100 would be deducted from taxable income and therefore only 30 per cent of this can deducted from tax obligation.
Service tax on ULIPs would mean the cost of investing in the capital market would increase by 12 per cent and this could affect capital market inflows.