Sensex shocked, stocks stumble

Before Finance Minister Nirmala Sitharaman rose in Parliament to present her ninth consecutive Budget, the stock markets seemed gung-ho with expectations. Half-an-hour before the speech, the Sensex, the index of Bombay Stock Exchange, was up almost 250 points, and the bulls were rearing to go. As the speech unveiled, and specific tax proposals related to investors poured out, the market sank by 1,000 points, and closed more than 1,800 points lower. The index lost more than two per cent, and the Nifty, the index for the National Stock Exchange, was down by a higher percentage.

While some analysts felt that the negative reaction was logical, given that Sitharaman had plugged the so-called holes, others claimed that the investors were spooked. “The immediate correction (in the stock markets) appears to be a knee-jerk response,” says Dhiraj Relli, MD & CEO, HDFC Securities. “This Budget is less about instant gratification. While there were no headline tax giveaways for investors, the continued focus on fiscal consolidation, capital expenditure, infrastructure growth, and economic stability creates a supportive backdrop for sustainable wealth creation,” adds Vikas Satija, MD & CEO, Shriram Wealth. Both seem guarded, but one can read between the lines at what they wish to indicate.

Sitharaman’s ninth Budget had no big-ticket reforms, but came with several promises about the future, including large-scale reforms in the banking and financial sector. As Relli hints, the market expected a few goodies, as it had got in the past through zero income tax on personal incomes up to Rs 12,00,000, and GST 2.0, both of which put more money in the pockets of the middle-class investors. Satija indicates that the markets invariably expect some proposals that lead to instant and immediate gratification, and create exuberance. These were lacking in this Budget, which was a mix of long-term vision, and immediate need to correct legal and tax technicalities.

Of course, the worst thing that happened was the higher securities transaction tax on futures, options, and derivatives. This was somewhat expected. In the past, Sebi, the market regulator, warned about retail exposure in these high-tech segments that the small investors did not understand, and burnt their fingers. A research paper by the regulator found that most retail investors lost money. However, for some savvy urban investors, especially day traders, derivatives are a cool and natural instrument to invest, and make money almost daily. This has emerged as their bread-butter-jam-ham, with profits jumping into their pockets. Since they are regular investors, they were peeved and angry, even frustrated.

At the other extreme was the clarification on buyback of shares by firms. Earlier, as the finance ministry and regulators sensed misuse in buybacks, which were being used by some promoters to use corporate cash reserves to line their pockets, the rules were changed. The proceeds of buybacks were treated as dividend income, and taxed as per the income slabs. This meant that the promoters had to invariably pay the highest taxes. This explains why promoters in some high-profile cases refused to participate in buybacks. However, the rule had a negative impact on small and no-promoter shareholders, who needed to bear a higher tax burden.

This Budget, the rules about buybacks became more complex. They benefited the non-promoter shareholders, as the tax on the proceeds from buybacks will be the same as capital gains. Hence, the money will be seen as capital gains, rather than dividend income, and the former generally attracts lower taxes. However, for corporate and non-corporate promoters, the tax burden remains higher. While the small investors should have rejoiced, the change had the opposite effect. It sent a signal that firms will be apprehensive to opt for buybacks, as the promoters will lose out. This implies that only large and confident firms, where the promoters may not wish to monetise their gains due to high valuations, will offer buybacks.

There were a few more knocks for the investors. The Budget stated that returns from sovereign bonds will attract zero capital gains tax, only if they are purchased when the bonds are initially offered, and the buyer retains them till the maturity date. This cuts out a whole set of buyers, who tend to buy towards the maturity dates, to make profits. Although the aim is to plug the loophole, the investors who benefited from it are obviously unhappy. Sometimes a noble intention can have opposite implications, and hurt genuine investors.

Other minor changes proved to be irritants. For example, “no deduction shall be allowed in respect of any interest expenditure incurred in relation to dividend income or income from units of mutual funds, and to omit the provision permitting such deduction.” But on the positive, there were minor tax changes that may help specific sets of investors. For example, the Government will introduce a time-bound scheme for declaration of foreign assets and incomes for taxpayers involving amounts below certain thresholds. In many cases, tax penalties will be converted into fees, and certain issues related to tax filings and returns will be decriminalised.

“Presently, there is a special tax rate on certain incomes in the nature of cash credits, unexplained investments, etc. The tax rate is 60 per cent, and the penalty is 10 per cent of tax. It is proposed to rationalize the tax rate to 30 per cent on these incomes. Penalty on such amounts will be merged with penalty for under-reporting of income in consequence of mis-reporting of income that is 200 per cent of tax amount,” stated one of the seemingly-small clarifications.

One of the major gainers may be the cooperatives. Primary cooperatives are allowed deductions of profits and gains on milk, oilseeds, fruits and vegetables. The Budget extends this to other items like cattle feed, and cotton seed. In addition, dividends received by a cooperative from another one will be allowed under the new tax regime, but only to the extent the money is further distributed to its members. Similarly, exemption to dividend income from investment in shares of a company will be allowed for three years. The deduction is limited to dividends received on investments till January 2026.

Another beneficiary of the tax changes may be not Indians but foreign consultants. They need a tax certainty that only their income from Indian sources will be taxed, especially if they stay in India for years. Hence, this Budget provides exemption to the global income (other than Indian) to an expert who visits India, and stays for five years. The service provided must be under a government scheme.