Mumbai/New Delhi: Hopes of fresh tax reforms, steps to revive demand and positive global cues lifted stocks on Tuesday, with benchmark equity indices gaining nearly 1.5%.

The BSE Sensex rose 581.64 points, or 1.48%, to 39,831.84, while the National Stock Exchange’s 50-share Nifty index gained 159.70 points, or 1.37%, to 11,786.85.

The Prime Minister’s Office (PMO) and the finance ministry are discussing the abolition of the dividend distribution tax (DDT), a review of tax slabs and a change in the holding period of assets to be eligible for tax savings, news agency IANS reported. The report also said the securities transaction tax and the tax on long-term capital gains above 1 lakh introduced in the 2018 budget were under review.

While budget proposals are prepared by individual ministries, the final call on significant proposals is a political one at the highest level.

Most Asian markets rose on Tuesday after the Wall Street hit a record on Monday amid hopes of progress in Sino-US trade talks and for another dose of policy stimulus from the Federal Reserve this week. In Japan, the Nikkei rose 0.47% and the Topix gained 0.86%, while South Korea’s Kospi closed slightly lower.

“This positivity is likely to stay in the short to medium term as concerns of the market are fading with a tax cut and the government’s intention to come out with more reforms in direct and indirect taxation. Clouds over the global market are gradually settling down, with developments in trade deal and Brexit, while rate cut expectation from the US Federal Reserve will further add impetus to emerging markets like India," said Vinod Nair, head of research at Geojit Financial Services Ltd.

The government, which has already reduced the corporate tax rate for businesses not claiming tax rebates and for new manufacturing companies in September, is in the process of examining a set of recommendations submitted in August by an expert panel on direct taxes led by Central Board of Direct Taxes member Akhilesh Ranjan.

The panel had recommended significant income-tax relief for the middle and upper middle classes, and favoured relief on DDT. At present, the same income of businesses is taxed thrice—first as a tax on corporate profit, then on the distributed profits of the company as DDT and then at the level of the recipient if the aggregate dividend received is above 10 lakh.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

Experts say a relief will be welcome. “The same income getting taxed at multiple levels seems unfair and a review of it in light of global best practices could make our tax regime more globally competitive," said Neeru Ahuja, partner at Deloitte India.

Early signs of an improvement in consumer spending during the festive season, the government’s focus on stimulating the economy and favourable global cues buoyed the markets on Tuesday, according to Gaurav Dua, head of capital market strategy and investments at Sharekhan by BNP Paribas.

“The results season has also been fairly decent this time around and is not likely to result in any material downgrade in earnings estimates at the Sensex/Nifty level. Thus, the bias has certainly turned positive now and the momentum could continue in November too," he said. “In immediate terms, the derivative expiry and the rollover of positions could result in usual bouts of volatility."

A weaker-than-expected performance by the Bharatiya Janata Party in the recent assembly elections might spur the government to focus on demand revival or structural reforms, analysts said, adding that the election results signalled the increasing focus on the economy and income growth.

According to Kotak Institutional Equities Research, the results of the assembly elections may push the government to double down on policy measures to address the ongoing economic slowdown.

“It would be interesting to watch the government’s response to a weaker-than-expected performance in the two state elections post a thumping win in the national elections less than six months ago... We argued earlier about a likely pivot to investment-led economic recovery, but the electoral ‘hiccup’ may force the government to focus more on near-term demand recovery. In this context, we believe the risks to fiscal slippage may have increased," the brokerage said in a 24 October note.

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