Budget 2018: Arun Jaitley hits the bullseye with LTCG

Equity se karoge pyar, toh LTCG se kaise karoge inkaar: this is how top market voices have summed up the re-introduction of long-term capital gains (LTCG) tax proposed in Budget 2018-19.

While stock markets started negatively reacting to the announcement initially, but by the end of trading, losses were limited to just 0.20% despite no major positive news for markets in the last full budget by the NDA government before the general election next year.

Finance minister Arun Jaitley's proposal to impose tax on LTCG exceeding Rs 1 lakh at the rate of 10% without allowing the benefit of any indexation has ruffled the feathers of market veterans, even though they don't admit it upfront. Like a forgotten nightmare, LTCG has comeback to haunt after long-term capital gains were made tax exempt in the 2004 Budget by introducing the securities transaction tax (STT).

Churning of stocks will happen and volumes may spurt. "With short-term capital gains tax remaining at 15%, the need to hold on to your investment for a year to benefit from LTCG has gone. Consequently, lot of churning is likely to happen happen. Since the distinction between long-term and short–term has largely disappeared, the market volumes are likely to go up," V K Vijayakumar, chief investment strategist, Geojit Financial Services, said.

In the short term, it will important to see where Nifty 50 goes from its closing of 11016.90. For the coming session, 10979 – 10950 would be seen as immediate support; whereas, 11071 followed by 11117 is likely to act as intra-day hurdles, points out Sameet Chavan, chief analyst - technical and derivatives, Angel Broking.

There is understandably a fear that markets may not have digested the full impact on LTCG on Thursday and a sell-off will happen from Friday. Investors from certain treaty protected countries should continue to enjoy the capital gains exemption as presently applicable.

"In the case of offshore funds, especially emerging-market funds with India allocation, the potential tax liabilities may need to be factored in their NAV effective April 1, 2018," Sameer Gupta, financial services tax leader, EY, said.

Importantly, all gains up to January 31, 2018, will be grandfathered. It is being hoped that this grandfathering of cost prices for LTCG will probably prevent any knee-jerk reaction in stock prices but imposition of tax is a clear negative for equity markets as far as sentiments are concerned, B Gopkumar, executive director & CEO, Reliance Securities, said.

His brokerage thinks HUL, Hero Motocorp, ITC, Godrej Agrovet, KNR Construction, J Kumar, NCC, JK Cement, Sagar Cement, Thyrocare, Dr Lal Path Labs, Gruh Finance, DHFL, Can Fin Homes, Apollo Tyres, and JK Tyres are budget beneficiaries.

Stocks markets participants, who were eyeing the fiscal deficit number, also are not enthused. Jaitley announced that the fiscal deficit target for fiscal 2018 and 2019 are at 3.5% and 3.3%, respectively.

"From a market perspective, the fiscal deficit number for fiscal 2018 at 3.5% was a bit higher than expected," Sudhakar Shanbhag, who oversees Rs 21,200 crore as CIO at Kotak Mahindra Life Insurance, said .

The Budget fiscal math means interest rates are sure to rise, a negative for stocks. Policy rate hike by the RBI would be a question of when and how many, and not if, during the course of the year. No wonder, bond yields spiked in the aftermath of the Budget, with the benchmark 10-year government bond going up by nearly 20 basis points.

"For this Budget, the real take-away therefore is a firm trend-reversal in interest rates – we are destined to confront high interest rates in the foreseeable future," Somnath Mukherjee, of ASK Wealth Advisors, said.

Lastly, stock markets seem neutral to the corporate tax cut. Jaitley has proposed to extend the benefit of reduced rate of 25% to companies who have reported turnover up to Rs 250 crore in the financial year 2016-17.

"The expectation was a reduction in corporate tax rates for all companies. Moreover, increase in cesses by 1%, increases tax costs for all," Hitesh D Gajaria, partner, tax, KPMG India, said.