The budget that will be presented on 1st February 2018 will be the last full budget before the 2019 general elections. Equity markets are on a sustained bull run with sensex gained close to 1700 points since the start of this year. One of the key factor driving sensex is the expectations from the union budget. Let us look at some of the key capital market expectations:
Taxation on dividends: According to Angel Broking, tax rate of 10% on dividends in excess of Rs 10 lakhs should be rationalized. Dividends are already subject to DDT and in addition, the companies pay taxes on the profits before declaring any dividends. Therefore, the current system creates multiple layer of taxation on dividends. The rationalization can be made by enhancing the current limit of Rs 10 lakhs or reducing or eliminating DDT.
Government spending: Markets welcome government spending as the investments create multiplier effect on the economic growth. Investments in sectors like infrastructure will create job opportunities that will improve the personal disposable income and will aid in consumption driven growth. Government has already hinted massive funding in infrastructure. However, revival of PPP model remains a challenge.
Corporate tax cut: India Inc seek a lower tax rate from the current statutory tax rate of 34.47%. In Budget 2015-16, the Finance Minister had laid out plan to reduce corporate tax to 25% over a period of four years, but the same has not yet been implemented. The current tax rate is making the industry uncompetitive as it is higher than some of the key Asian economies. Any reduction in corporate tax rate will be welcomed by markets as lower rates leads to higher investments and job creation.
Tax benefits to equity investors: According to Angel Broking, a separate sub section under 80C for ELSS funds and Infrastructure stocks with a separable sub limit will provide a big boost for equities in the long run. In addition, government should also consider including mutual funds for Sec 54EC benefits. The benefits of the Section 54EC are available when long term capital gains are reinvested in specific infrastructure bonds with a lock-in period. In the past, mutual funds and infrastructure equities were also included under the definition of eligible investments under Section 54EC of the Income Tax Act. Such measures will provide incentives to the investors to invest in equity markets.
Government finances: Markets will expect moderate fiscal slippage. This is because a higher fiscal deficit will have significant implications like rising prices, possibility of no rate cut and increase in bond yields. With international oil prices rising, management of trade deficit and fiscal deficit will be a key factor in determining the future market direction.