Anticipating Budget 2018-19

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Warm Greetings from PenguWIN:

            In a few hours, Finance Minister Mr. Jaitley will be presenting the Union Budget for 2018-19. No, this is not a commentary on Budget or a wish list as Budget details are kept confidential.

In this blog, I plan to highlight an important change with respect to Equity investing. The change might not be proposed by FM (like last year when it was expected but finally did not occur), significance of the change could be lower or more. Every business vertical including Banks, SME, NBFCs, Insurance and Mutual Funds prepare a wish list and send it the F.M. However, there is no certainty whether the proposals will get accepted or turn out to be worse than anticipated.

MFs proposal include, bringing down LTCG (Long Term Capital Gains) tax of the debt funds from 3 years back to 1 year, which was the treatment until 2014, approval to launch Debt based Tax saver funds like Equity Linked Savings Scheme – DLSS, lowering threshold limit from 65% to 50% for equity-based taxation and removal of Securities Transaction Tax (STT) for MFs and Exchange Traded Funds. The ask on reversing the debt fund taxation from 3 years to 1 year is a little too much in my POV, when the FM is grappling for new resources to fund schemes for sectors like Agriculture.

Equity investing (Mutual Funds and Stocks) is attractive for 2 reasons; primary one being the potential to deliver highest and inflation beating returns, among the various asset classes (proven across the globe). Second is the unique tax aspect where LTCG is zero. i.e. principal and gains held greater than 1 year is tax free (15%, if the holding period is less than a year). No other asset class enjoys this kind of tax benefit which was Implemented in 2005, to encourage people to invest in Equity. But, the logical reasoning of Equity as a long-term investment vehicle and wealth creator is paradoxical with the tax benefit of reaping the gains in a years’ time. Equity is not a product for 1-year time horizon and because it has given excellent returns in a year like 2017, it should not be misconstrued.

There are lot of rumours going around saying that the FM will bring back the LTCG Tax for Equity. Some say it would be made 3 years instead of 1 which means the second and third year redemptions will also attract 15% tax, a flat tax rate of X% when funds are redeemed or a progressive structure (tax rate increases with the income slab). However, the same commotion happened during the run up to last years budget and finally the FM maintained status quo

Some of the major countries in the world do tax capital gains from stocks:

  • US has LTCG tax for equities which is a progressive structure
  • Germany has gains taxed fully, including a 25% withholding tax,
  • Canada has 50% deduction on CGs split between Federal and Province
  • Brazil has progressive taxation on CGs between 15 to 22.5%
  • Singapore does not tax capital gains

What will be the outcome if FM introduces LTCG in some way for Equity Investments in India?

  • In case if LTCG is announced, the chances that the markets will react negatively is high. This will be a temporary phenomenon as taxing capital gains is a practice in most countries and we need to reconcile to reality.
  • What are the alternative investment options? Can Real Estate or Gold or Bank, Govt. and Company deposits provide better returns. I can confidently say that even after taxation, Equity will continue to be the best asset class for long term wealth creation. We can take the cue from the level of equity penetration, which is far higher in countries where LTCG is in place, compared to India.
  • Investors with a short time frame and using Equity markets for short term gains will slowly disappear and only investors who want to invest with a minimum or 3 years+ will remain in the market (PenguWIN recommends pure Equity investing only for time frame of 5Y+)

Viewing budget telecast live is an interesting experience and if you have interest in finance, I would definitely recommend.

Keep a track on Sensex, Nifty and other key indices and you will see them moving up and down with every announcement that is favourable or unfavourable to markets.

At the end of the day when our CEOs are asked by reporters/analysts on how they think the budget was, I can tell that they will present a positive picture, irrespective of whether it is good or bad. A few bold CEOs will give the real perspective and ones who are close to the opposition will say that its insipid and wasted opportunity

 

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