The major announcements in the budget with direct implication to the capital market are the introduction of Long-term Capital Gain Tax (LTCG) without tweaking STT (security transaction tax) and slippage in fiscal deficit. This time, the capital market was expecting for a balance between fiscal and growth. The shortfall of tax and non-tax revenue caused to revise the fiscal deficit estimates for FY18 to Rs 5.95 lakh crore at 3.5 per cent of GDP from earlier target of 3.2 per cent.
This may be largely factored by the market but slippage in fiscal deficit in FY19 to 3.3 per cent from earlier target of 3 per cent may impact the bond yield to increase in the short-term. This can indirectly impact the equity market due to increase in cost of interest and outlook for inflation and INR. Bond market is currently responding negatively, the 10 year government bond yield has increased to 7.58 per cent versus 6.40 per cent in last six months.
The introduction of LTCG on listed equities may hurt the investors in the short to medium-term. Finance minister Arun Jaitley introduced a tax rate of 10% for long-term capital gains exceeding Rs 1 lakh without allowing indexation, however the gains up to 31st January 2018 will be grandfathered. Further, the budget proposed a tax rate of 10% on distributed income by equity oriented mutual fund to provide a level playing field across growth oriented and dividend distributing funds. The short-term tax has been maintained at 15 per cent. The budget has also kept the STT rates unchanged in spite of the introduction of LTCG.
Corporate tax has been reduced for MSME from 30 to 25 per cent for less than Rs 250 cr turnover. MSME is a major engine of growth and employment in the economy. Plan is to support for credit and capital growth given the formalisation post demonetisation and GST. Financing under MUDRA yogana proposed to get Rs 3 lakh cr in FY19.
In a nutshell, as anticipated the focus was more towards improving the livelihood of low-income segment, Agri economy and infrastructure.
The writer is head of Research, Geojit BNP Paribas