Mumbai: The Indian stock market did not have anything to immediately?cheer?about from the 2008 Union Budget.
While it appears to have taken in its stride the Rs60,000 crore agriculture loan waiver package that was unveiled, the proposal to raise short-term capital gains (STCG) tax from 10% to 15% sent investors rushing to sell stocks, pulling down India’s bellwether index, the Sensex, 245.76 points, or 1.38%, to close at 17,578.72 in a volatile trading session.
STCG tax is the tax on income derived from the sale of an investment within a year of making the investment.
The stock market is “disappointed” by “the increase in STCG tax and non-removal of surcharge on corporate tax,” said Nirmal Jain, managing director of publicly-traded retail brokerage firm India Infoline Ltd. Gaurav Dua, head of equity research at online brokerage Sharekhan Ltd, too, said the STCG tax and no reduction in corporate tax will have negative impact on the capital market. Indian companies pay 30% corporate tax and 10% surcharge on it, besides a 2% education cess.
The corporate income-tax, surcharge, securities transaction tax and peak rate of customs duty were left unchanged in the Budget.
Day traders, who buy and sell stocks during the day without taking any position, will be most affected by the rise in STCG tax. Those investors who stay put in the market for more than a year do not pay any capital gains tax. Not too many brokerages, however, share the “disappointment” of Jain and Dua on the STCG tax.
“Its impact will be temporary,” said Andrew Holland, managing director of DSP Merrill Lynch Ltd in India.
Vallabh Bhansali, chairman of Enam Securities Pvt. Ltd, also said the STCG tax hike, though “a slight dampener and avoidable”, will be “neutral in long term.”
Some of them, such as Sandeep Dasgupta, chief executive of Bharti AXA Investment Managers Pvt. Ltd, even say the hike in tax will encourage “investments into equity mutual funds by retail investors”.
Finance minister P. Chidambaram, in his Budget speech, maintained the tax hike will encourage people to remain invested in the market.
Overall, brokerages had a mixed reaction toward the annual Budget ritual.
V.R. Srinivasan, chief executive of Mumbai-based brokerage Bric Securities Ltd, said the Budget is populist and there is “no big surprise” for the equity market but R. Swaminathan, head of mutual funds at IDBI Capital Ltd, said the Budget packed some positive steps for the capital markets.
The dividend distribution set-off being made available to the parent company is one such step, he noted.
The introduction of commodities transaction tax, currency exchange traded fund, interest rate future market and the rationalization of stamp duty rates are some other positive developments for the market, said analysts.
The reduction in cost of trading in options, will “help increase liquidity as it will attract more traders into the options market,” said Gurudatta Dhanokar, derivative strategist at Mumbai-based Almondz Global Securities Ltd.
The loan-waiver package initially pulled down the bank stocks, but the government promise for liquidity support propped up these stocksand the bank stock index of the Bombay Stock Exchange (BSE) gained 0.4%.
The other gainers in a falling market were the auto makers.
Auto stocks gained on proposals of excise duty cuts. The excise duty on small cars has been cut to 12% from 16%, and on hybrid cars to 14% from 24%. The BSE Auto index gained 1.19%.
Small car manufacturer Maruti Suzuki India Ltd gained 3.8%, while two-wheeler stocks Bajaj Auto Ltd and Hero Honda Motors Ltd gained 2.7% and 2.3%, respectively. The excise duty on bikes was also cut from 16% to 12%.