On Friday, I wrote an article on what to expect from the budget. In the article, I had stated that I do not think the budget will be bad as the economy is in dire need of help. However, my assumption proved to be wrong as the budget yesterday did one hell of a number on the Indian financial market. I say this as once the budget ended the stock market went in for a steep decline that caused the Nifty to tumble by 300(2.51%) points whilst the Sensex and Bank Nifty dived by 987 (2.43%) and 1,012 (3.28%) points. Hence, in this article, I shall look at what parts of the budget caused the market to have such a steep decline.
One feature of the budget the finance minister kept on harping about when explaining the tax section was that the budget was simplifying the tax regime. However, in actuality, the budget has caused more confusion, as many individuals will be now more perplexed as it has made the tax system a much more complicated process for the average citizen. Another issue with the budget is that while the new tax system theoretically provides lower tax rates but due to the removal of all exemptions in particular the 80C benefits; thus, this makes the usefulness of the lower tax rates rather prosaic.
Dividend Distribution Tax:
The Finance Minister proclaimed her abolition of the dividend distribution tax was a big win for investors. However, it has turned out to be a curse for several investors due to the way the ministry remodelled it. This is as dividends will now be taxed in the hands of the beneficiary which will cause most retail investors to pay much more than was being paid earlier thus increasing the tax burden and further tightening the finances of investors. I say this as the current dividend distribution tax when combined with cess and surcharge comes in at 20.35% which is lower than what was being paid by investors who fall into the tax slab of 20% and more. Moreover, high net worth investors will now end up paying up to 42% of their dividends which is simply bizarre.
Initially, when the government started its disinvestment drive I had mentioned many times that the state was pushing the limits on this course of action as you cannot just start selling a stake in all crucial investments made by the government over decades. However, in this budget, the government went ahead and set the disinvestment target to Rs 2.10 lakh crore, which is simply too high and unrealistic. Moreover, it also shows that the disinvestment spree has taken a dangerous turn.
Long term capital gains:
The finance ministry has constantly harped on the fact that they are consulting industry players on what to do to improve the prospects of the economy. One request the financial market players have been making constantly is for the ministry to make some tweaks in the Long Term Capital Gains tax. However, on this front, there was no announcement which caused the markets to head for the hills.
The finance ministry released calculations regarding how taxpayers will benefit from the new tax regime. However, the projected gains were stretched as they made incorrect assumptions. The most simple and basic assumption made by the ministry is that an individual’s taxable income will remain the same when moved from the old to the new system. However, this is a flawed assumption as, under the new system, taxable income levels will rise significantly without the total income increasing because of the removal of deductions and exemptions. Hence, the overall mathematical calculations released by the ministry in this aspect was not correct. Moreover, the confusion in calculations continues in some other areas too.
Real estate sector:
Numerous sectors have not been doing well of late but the real estate sector is one that has been facing the brunt for quite a while. Hence, market players assumed that there would be some relief to the sector, but in the budget there was no specific announcement made on how to revive the sector as a whole.
Till date for a resident individual to be classified as an ordinarily resident for income tax purposes, the individual had to satisfy two conditions. However, this budget proposes to remove the condition that the individual ought to be physically present in India for over 729 days in the last 7 years to be considered as an ordinarily resident. Hence, this move by the government will widen the tax base as Indian’s living abroad will have to now also pay some tax in India. This will bring in more revenue for the government but will hurt the fund flow in the long run as individuals will look for ways to break free from this rule which I believe in the long term will reduce the fund flow from NRI’s. Hence, this is a short-term gain for a long-term loss.
Overall, the budget presented by the ministry was meant to be path-breaking so as to find a new way to break the economy out of the rut it is in. However, it provided no concrete solutions for the underlying economic problems of the country such as high unemployment and lack of demand. Moreover, it seemed to be a budget that tried to do repairs that were rather cosmetic, and this is one of the reasons the market took such a nosedive. Coming to what I expect. I expect the same cycle of the last budget to start once again, where there will be unending statements of consultations by the ministry after which some revisions will be made. Lastly, as mentioned in my last article I already had expected Monday to be a bearish open due to the Chinese market reopening but I now believe that the open of the market may be worsened owing to the budget awakening the bears which will help amplify the downhill descent. There may be small bounces along the way as the market readjusts from being extremely oversold, but the overall trend is most definitely bearish.