The Budget announcement on 1 February 2018 by the Finance Minister Arun Jaitley of a 10 percent tax on long term capital gains (LTCG) on equity indeed spooked the market hitherto cosseted irrationally with a zero tax status and preferential norm for reckoning the long term status with the latter still continuing. The former finance minister P. Chidambaram introduced securities transactions tax (STT) in 2004 in replacement of tax on LTCG from equity on the smug ground that it was far easier to collect taxes from a single source---stock exchanges---rather than from millions of investors and traders thronging the market.
One thought Jaitley would move decisively away from this irrational tax exemption for the relatively well-heeled in his very first Budget in 2014. It has taken him four years to muster courage and bring about horizontal equity --- when the hard earned wages can be taxed, the earned or unearned capital gains should also be taxed. He has done well to persist with STT to send a clear message that STT is a turnover tax distinct from income tax.
That the investors would see reason and allow their anger to melt away isn’t an unreasonable expectation. Didn’t the foreign institutional investors (FIIs) who avoided tax even on short term capital gains made in the Indian bourses by routing their investments via Mauritius continue to patronise India after a brief sulking? The Modi government must be complimented for mustering courage to dismantle the invidious DTAA with Mauritius and follow it up with a 10 percent tax on LTCG on everyone secularly.
The steady fall in Sensex and Nifty following the Budget is not only due to the proposed 10 percent tax on LTCG but also in sympathy with the worldwide trends notably the one triggered by the US markets. US have sent harsh signals that the days of cheap money are over. That FIIs have withdrawn Rs 1,261 crore by relentlessly selling on 5th February on the first full working day post Budget and Rs 2,326 crore on 6th February, reflects both their anger and sensing of opportunities back home.
But what is heartening is the domestic institutional investors (DIIs) have been quick to quickly realise the reality---after selling furiously on 1st and 2nd February at Rs 359 crore And Rs 509 crore they turned net buyers on the 5th at Rs 1,164 crore and on 6th at Rs 1,700 crore clearly sending the message that DIIs have come to chart their own course and their worldview is and has been different from FIIs.
Today i.e. 7 February 2018, the Asian markets have woken up on a positive note registering modest gains in sympathy with the Dow Jones index on Tuesday. The point is the Indian market may be liquidity driven rather than fundamentals driven as it should be but it is no longer under the thrall of the FIIs. The following recent statistics showing net investments in crores of Indian rupees prove this to the hilt.
The above chart brings out a heartening feature of our market. DIIs do not walk in lock step with the FIIs. They have their own compulsions and motives. They do their own research. Of course they factor in global developments but by applying their own minds and not merely aping the FIIs or blindly following them.
Mutual funds are now a very large component of the DII. They are nimble footed in proactively taking a call on the market on a daily basis. Finance Minister Jaitley perhaps has an ace up his sleeve -- when the finance bill comes up for discussion and approval in the Lok Sabha he could possibly cut the proposed dividend distribution tax of 10 percent on equity oriented mutual funds to 5 percent if only to encourage investments through the mutual fund route.
Equity remains the most softly taxed investment even after Budget 2018. There is no reason why the Indian bourses would not see this reality. Of course it might not witness the same frenetic uptick it witnessed in large parts of 2017 (28 percent jump in Sensex) and in the first month of 2018 due to hardening of oil prices and interest rates as well as the sustained lull in the investment in manufacturing that portends sluggish growth in employment opportunities as well. But till liquidity drives the markets, fundamentals could take a backseat.
(The writer tweets @SMurlidharan)
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Updated Date: Feb 07, 2018 12:20:14 IST