It was not a pleasant opening for the stock markets on Friday as the global cues were negative. The opening was the day's high for the BSE Sensex and it plunged by over 500 points intra-day to a low of 17,258.20 soon after the finance minister completed his budget speech.
Stock prices reacted bearishly first to the news of mammoth agricultural loan waiver and when direct tax implications for capital markets details were announced. Markets recovered a little from its lows and the Sensex closed at 17,578.72, down 245.76 points or 1.38 per cent.
"The hike in the short-term capital gains tax may be a slight damper and avoidable, but will be long-term neutral," said Vallabh Bhansali, Chairman, Enam Securities. The short-term capital gains on share transactions have been hiked from 10 to 15 per cent. Though it is not expected to have a major impact on long-term investors, traders will take a hit. 'This is a little bit negative but not much of an issue in the long term," said Nilesh Shah, CEO, Ambit Capital.
"The mood is a little subdued in the market right now. The increase in short-term capital gains tax has impacted traders' sentiment. We expect the markets to remain ranged till the end of next month," said Dev Kapadia, chief dealer of Lalkar Securities. However, the asset management industry finds it a welcome move as it will encourage investments into mutual funds by retail investors. "An increase in the tax will discourage speculative investments and will not impact investment flows in the medium term," said Sandeep Dasgupta, CEO Bharti AXA Investment Managers.
Trader sentiment is also hit by the change in the treatment of the securities transaction tax to deductible expenditure against business income. "The tax burden for short-term traders will increase. Further, transaction costs are likely to increase on account of the proposed tax on services of stock exchanges. These two proposals are likely to increase transaction costs for arbitrageurs by about75 per cent," said Himanshu Varia, institutional sales, Asit C Mehta Securities.
While excise duty cuts are looked upon as positives for some sectors like automobiles and pharmaceuticals, there is disappointment that corporate tax rates have been kept unchanged. The dividend distribution tax change for holding companies is welcome but there is a feeling the double taxation of dividends should have been abolished to boost investment.