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 rural economy, employment situation and controlling inflation. There were proposals towards making India as manufacturing hub also. Make in India is flagship programme of our government and budget has given focus on this. Apart from this government has also focused on social sector reforms by introducing health care scheme for 40% of 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 salaries taxpayers - standard deduction of 40000, however few tax free allowance 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.  Equity mutual fund dividend distribution tax will be 10% (Deduction will be made by AMC but tax free in hand of Investor).
  • Cess increased to 4% from 3%.

 These were the major highlights for the union budget. Apart from this government has given much awaited focus on farmers and rural economy.

But now let’s understand the implication of 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. 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 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 on wards, 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 best of returns since beginning as an asset class. No other asset classes has delivered better returns then this asset class and trust us no one will be in future. Average return on Sensex is approx 17% YOY. So all other asset class is not even nearer to equity as on 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 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 rural economy and consumption level our fundamental will become stronger. Indian economy is 2nd largest consumer market in the world and 5th largest economy in the world. We as an economy are growing on a pace of 7% GDP growth rate wherein budget estimates is targeting 8% GDP growth for coming financial year as rural consumption is bound to increase as government is increasing capital expenditure in rural area. New employment strategy will start new income for 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 needs 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 overall growth of 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 availability for corporate and manufacturing units. So when demand increases they will definitely capitalize this money for further demand meet so profitability will automatically increases for companies. Now end of the day, this high profitability will reflect in Capital market by way of stock market. Intrinsic value of shares will increase, Valuations for companies will increase so as an investor we will be benefited any way.

In short term, market was expecting correction. But it was not happening because of solid earnings from corporate. LTCG tax is a trigger for market along with high US and Indian bond yields from last one month. MID cap indexes were already in profit booking mode from 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 next 2-3 months market will remain in range of 10600 to 11100 with high volatility. In real terms, 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 equity market. Equity markets will be increasing in tune with GDP growth rates and International market are also supportive because major of bigger economy is coming out of recession. But definitely, we as an investor needs to adjust target of expected returns on our investment after considering LTCG tax. But again we will see more growth in GDP and Consumption level. We will see more growth in corporate earnings so definitely returns from markets will be better than what we have received. We are in long term bull market and it will continue for next 7-10 Year.

For any further query, please feel free to mail us, call us or write to us.

Happy investing & Keep investing! 

     
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Disclaimer


All view point presented in above article is of MR. Rohit Khandelwal. He is been associated with www.Moneymatters.co.in. He is AMFI registered mutual fund advisor.

For taking any decision based on tax implication, 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 offer document carefully.

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