India Inc speaks: Budget 2017 comes as a tax respite

There were high expectations from Budget 2017. On one hand, there were wide-spread expectations on relief in direct taxes, while on the other, there was keenness to see the government addressing rural and agrarian distress yet maintaining fiscal discipline. Considering the wide and times divergent range of expectations, the Budget has delivered.

While relief on direct tax front is not very significant, it scores well on coverage leading to higher savings or consumption and adding to economic growth. Also, this is the fair way to reward people who despite their limited means have been upright citizens contributing to the exchequer, unlike millions who stay out of the formal economy. Any benefits to the government by way of higher tax collections and widening of tax base post demonetization should have definitely gone to these sections of our society.

Coming to capital markets and retail investors – no bad news is good news! Despite the Finance minister’s very prompt clarifications, there were lurking fears about possible changes to the treatment of long-term capital gains. It is a big relief that this has been left untouched. There were hopes that some benefits for investments under section 80C might be enhanced but they did not come about and that should not be seen as a show-stopper as far as directing flows to capital markets is concerned.

Capital markets and more specifically equity mutual funds have been seeing record breaking inflows on the back of sharp reduction in interest rates and a culture of SIPping gaining momentum amongst middle-class investors. The Budget has only added further impetus to this movement. Selling land holdings and real estate has been made attractive now with the change of base year for indexation and reduction in tenure of holdings to qualify as long term; now down from three years to two years holding. From a seller’s perspective, the asking price now should be lower and liquidity should go up given the reduction in tax liability and willingness to liquidate. Let’s not forget there is this overhang on the real estate market with clamping down on black-money generation and moves to act against benami properties.

Further, a ban on cash transactions for amounts over Rs 3 lakh will ensure gold transactions becoming more and more unattractive. This kind of tectonic shift in how people view their real estate and gold investments will only result in higher and higher participation in capital market products. These moves aided with the thrust on tax compliance and widening the tax base are bound to multiply capital-market participation in the years to come.

Lastly, the government has done very well to stay the course on fiscal discipline. This will ensure interest-rate expectations and inflationary pressures remain under check, foreigners continue to view us as a bankable investment destination and we see some rating upgrades from international agencies at some point in time.

All in all, while there are no direct benefits to retail investors, I am very happy that overall health of our economy, governance, investment climate and push towards “capital marketisation” of our investments bodes very well for retail investors and the kind of returns they can expect by participating in equity markets. No other class has the potential to give higher post-tax returns than equity. Just buy excellent companies or mutual funds and remain invested.

Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services Ltd