Finance minister may not hit bullseye this time

With few days to the interim Budget 2019, the last before the general elections, the stock market is not expecting any significant impact.

Unlike the last year, when the market rally of 2017-18 was roiled as the government re-introduced long-term capital gains (LTCG) tax of 10% on equity investments (mutual funds and stocks) above Rs 1 lakh, this time analysts are not expecting any surprise that may cheer up the volatile market.

Before April 1, 2018, there was no tax on capital gains on equities if the investments were held for more than a year. However, according to the Budget 2018 proposals, LTCG was imposed over Rs 1 lakh gains arising from a redemption of mutual funds or equities on or after April 1, 2018, at 10.4%, including cess. LTCG till Rs 1 lakh was exempted.

However, there was a grandfather clause as all long-term capital gains made till January 31, 2018, were given tax exemption.

As per the data compiled from income tax returns filed for 2017-18, prior to the implementation of LTCG, the income earned from the equity markets was around Rs 3.76 lakh crore, implying around Rs 37,000 crore of tax collection was possible if LTCG gets implemented. The government was eyeing a tax collection of Rs 37,000-38,000 crore from LTCG this year, though the target may not be achieved as the stock market has remained bearish through most of the current fiscal, according to analysts.

A K Prabhakar, head-research, IDBI Capital, said the market did not perform, so this may not have benefited the government.

According to him, the last year's announcement on LTCG upset the market. Besides, there are multiple other taxes, including corporate tax on profit, dividend distribution tax and securities transaction tax, and no changes are expected in any of these tax structures in the interim Budget, he said.

To further ensure that investors' don't try to escape LTCG tax by switching to dividend plans, the dividend distribution tax of 10% for equity-oriented mutual funds was also introduced in Budget 2018.

In Budget 2018, the last full Budget of the current government, a higher-than-expected fiscal deficit target for 2018-19 was announced, which also impacted the stock market. Finance minister Arun Jaitley set the government's fiscal deficit target at 3.3% of gross domestic product for 2018-19, higher than the market expectation of 3.2%.

Dhiraj Relli, managing director and CEO, HDFC Securities, said the fiscal deficit has already breached the budgeted target, and touched 114.8% of budgeted estimates versus 112% last year.

"Given that serious fiscal constraints looms, the government is unlikely to go the fiscal profligacy path. While the government has the option to resort to off-Budget financing of expenditure to display a healthy picture, this is just pushing the hard decisions for future," Relli said.

According to Prabhakar, no major announcement is expected this year.

"The government might exceed its fiscal deficit target. However, a lot of sops can be announced for rural distress, farmers, micro, small and medium enterprises. For the middle class, there might be an increase in income tax deduction slab," he said.

Relli said the capital markets may expect little from the vote on account, and the markets would be driven more by the macro developments across the globe, hinting at the pace of slowdown, third quarter corporate results outcome and political noises, arrangements leading to shifting expectations about the post-poll arithmetic.

Motilal Oswal in its Union Budget 2019-20 preview said calculations suggest a shortfall of Rs 1.5 lakh crore in gross tax receipts, which is expected to be partly offset by the RBI's interim dividend (Rs 30,000 crore) and unutilised compensation cess (Rs 20,000 crore).

"If the government wants to meet its deficit target of 3.3% of GDP with a shortfall of such receipts, then spending growth will have to moderate from 13.6% year on year in the first half of fiscal 2019 to 5.7% in the second half. This, in our view, would lead to higher-than-expected slowdown in the economy."

The report said the government is likely to deliver 3.5% deficit for the third consecutive year in FY2019, implying a modest slowdown in spending growth from 13.6% in H1FY19 to 11.5% in H2.

"Since the deficit target seems difficult to achieve keeping in mind the economic reality, a slippage of 20 bps should not be of much concern for the economy or the financial markets," it said.

Kotak Securities, in its interim Budget preview, said in 2018-19, the largest downside to revenues has been from the goods and services tax (GST) collections with the shortfall likely at around Rs 1.4 lakh crore. Even with the assumptions of higher interim dividend from the Reserve Bank of India, and divestment target being met, the fiscal 2019 GFD/GDP is likely to be at 3.5% without large expenditure cuts.

"In order to meet the budgeted targets, the government will need to use levers such as aggressive rollover of 2018-19 expenditure and amending the rules to use the unutilised portion of the compensation cess fund. Unless fiscal 2019 budgeted GFD/GDP of 3.3% is met, we expect the fiscal 2020 budgeted GFD/GDP at around 3.2% (compared to 3.1% as per the medium-term roadmap)," the report said.

THE STORY SO FAR

• Long-term capital gains tax of 10% on equity investments (mutual funds and stocks) above Rs 1 lakh
   
• There was a grandfather clause as all long-term capital gains made till January 31, 2018, were given tax exemption
   
• The dividend distribution tax of 10% for equity-oriented mutual funds was also introduced in Budget 2018