Union Budget 2018-2019 : Impact and Analysis
Union Budget 2018-2019: Impact and Analysis
Annual budget proposals have
been tabled yesterday by Mr. Arun Jaitely (Finance Minister) in Parliament.
There were many proposals to boost the rural economy, employment situation and
controlling inflation. There were proposals towards making India a manufacturing hub also. Make in India is the flagship program of our government
and the budget has given focus on this. Apart from this, the government has also focused
on social sector reforms by introducing a health care scheme for 40% of
the population of India. Corporate tax has been reduced to 25% from 30% for SME and
MSME whose turnover is less than 250 Cr in a year.
Union Budget Proposals
|
- Indian stamp act to be modified in consultation with states.
- Bank Bill discounting to be linked with GSTN.
- New gold policy to be announced.
- Fiscal Deficit at 3.5% of GDP for 17-18 and 3.3% of GDP for 18-19.
- Presumptive income tax compliance for business and profession not satisfactory.
- 80JJAA days limit reduced for Textile and footwear industry to 150 days.
- No adjustment u/s 50C / 43CA if stamp duty value variation is 5%.
- Tax rate reduced to 25% for companies having turnover Up to 250 Cr.
- No change in individual tax slab.
- Relief to salaried taxpayers - standard deduction of 40000, however, few tax-free allowances removed.
- Senior citizen - interest income on fixed deposit, post office exempt till 50000, medical insurance limit revised.
- Payment by Trust in cash above 10,000 to be disallowed, TDS provision for disallowance.
- LTCG above 100000 to be taxed at 10% without indexation. The equity mutual fund dividend distribution tax will be 10% (Deduction will be made by AMC but tax-free in the hand of Investor).
- Cess increased to 4% from 3%.
These were the major highlights of the union budget.
Apart from this, the government has given much-awaited focus on farmers and rural
economy.
But now let’s understand the implication of the introduction
of LTCG tax, how it is going to affect us as an investor. Budget proposal has
re-introduced LTCG tax for investor in equity.
Reason Given
|
Currently, long term capital
gains arising from transfer of listed equity shares, units of equity-oriented
fund and unit of a business trust are exempt from tax. With the reforms
introduced by the Government and incentives given so far, the equity market has
become buoyant. The total amount of exempted capital gains from listed shares
and units is around `3,67,000 crores as per returns filed for A.Y.17-18. A major
part of this gain has accrued to corporate and LLPs. This has also created a
bias against manufacturing, leading to more business surpluses being invested
in financial assets. The return on investment in equity is already quite
attractive even without tax exemption. There is, therefore, a strong case for
bringing long term capital gains from listed equities in the tax net. However,
recognizing the fact that a vibrant equity market is essential for economic
growth.
How LTCG Tax Is Going To
Work
|
Announcement:
- Tax Rate: Capital gains over Rs. 1 Lakh to be taxed at 10% (no indexation benefit).
- Asset class: On listed equity shares, equity-oriented mutual funds and units of a business trust.
- Method of Calculation: Any notional gains till Jan 31, 2018, are proposed to be exempted in calculations for long-term capital gains.
- Applicability: From April 1, 2018, as per Finance Bill 2018.
Investment Implications:
- For redemptions done on Feb 1, 2018 – March 31, 2018: No LTCG Payable.
- For redemptions done April 1, 2018, onwards, LTCG payable on the difference in (i) value between Jan 31, 2018, or cost of acquisition, whichever is higher; and (ii) Sell Date.
- Example: Assuming a stock bought for Rs 100 on July 1, 2017, market-rate on Jan 31, 2018, is Rs 150, sold on June 30 for Rs 180, LTCG payable in FY18-19 will be on Rs. 30 (Rs. 180- Rs.150).
Our Take On LTCG Tax
|
We at moneymatters believe
that Equity has been generating the best of returns since the beginning as an asset
class. No other asset classes have delivered better returns then this asset
class and trust us no one will be in the future. Average return on Sensex is approx
17% YOY. So all other asset class is not even nearer to equity as an asset
class. If we consider LTCG tax for your investment and assume that you were
able to generate returns of 17% on your equity / Equity MF investment, so now
after LTCG also you will end up with a return of 15.30% which is still very high
compared to other asset class.
Economy fundamentals are still
intact or rather we say going forward by way of improvement in the rural economy
and consumption level our fundamentals will become stronger. Indian economy is 2nd
the largest consumer market in the world and the 5th largest economy in the
world. We as an economy are growing at a pace of 7% GDP growth rate wherein
budget estimates are targeting 8% GDP growth for coming financial year as rural
consumption is bound to increase as the government is increasing capital
expenditure in the rural area. A new employment strategy will start a new income for
the unemployed population for our country which will again lead to more
consumption. Now if consumption increases then demand increases and when demand
increases than more manufacturing units will be required or existing units
need to increase their capacity which will lead to more capital expenditures
by corporate and manufacturing units. Now this will lead to more credit take off
from banks which will lead to the overall growth of the economy. So in brief, demand will increase capacity
and capacity will increase supply which will lead to higher GDP growth and
better tax collection.
Most importantly, corporate
tax for companies which have less than 250 Cr turnover has been reduced to 25%
from 30% which leads to more liquidity available for corporate and
manufacturing units. So when demand increases they will definitely capitalize
this money for further demand meet so profitability will automatically
increase for companies. At now the end of the day, this high profitability will
reflect in the Capital market by way of the stock market. The intrinsic value of shares
will increase, Valuations for companies will increase so as an investor we will
be benefited anyway.
In the short term, the market was
expecting a correction. But it was not happening because of solid earnings from
corporate. LTCG tax is a trigger for the market along with high US and Indian bond
yields from the last one month. MID cap indexes were already in profit booking mode
from the last 15 days as it was down by 5% from its peak and individual shares were
down by 8-10% because of real profit booking.
Expect levels of 10600 on nifty and for the next 2-3 months market will
remain in range of 10600 to 11100 with high volatility. In real terms, the market
has already discounted the LTCG tax effect and taking correction on high bond
yields and surge in global crude prices.
But as per our view,
fundamentals are intact or rather better for the equity market. Equity markets will
be increasing in tune with GDP growth rates and the International market is also
supportive because the major of the bigger economy is coming out of recession. But definitely,
we as an investor need to adjust the target of expected returns on our investment
after considering LTCG tax. But again we will see more growth in GDP and
Consumption levels. We will see more growth in corporate earnings so definitely
returns from markets will be better than what we have received. We are in the long
term bull market and it will continue for the next 7-10 Year.
For any further query, please feel free to mail us, call
us or write to us.
Happy investing & Keep investing!
Contact Us
|
+918826012778
Disclaimer
|
All viewpoint presented in the above
article is of MR. Rohit Khandelwal. He is been associated with www.Moneymatters.co.in. He is an AMFI
registered mutual fund advisor.
For taking any decision based on
tax implications, kindly consult your tax consultant before. Moneymatters.co.in
doesn’t guarantee accuracy of tax implication.
Mutual funds and equity markets are subject to market risk. And we and our
employee don’t guarantee any product returns. Kindly refer desired documents
before investments and read the offer document carefully.
Comments
Post a Comment