Benchmark indices wobbled ahead of the budget on Friday. They traded flat just before the budget presentation by Finance Minister Nirmala Sitharaman. She made a speech that offered a lot to a large section of the public in terms of incentives for low-cost housing to rural and urban infrastructure. The focus was rightly on the rural and urban poor.
However, as she announced an increase in surcharge on income-tax for those earning between Rs 2 crore and Rs 5 crore, and Rs 5 crore and above, there was a sharp slump in the Sensex and Nifty values. Clearly, an influential category of investors were peeved. The sentiment impact was seen as Indian shares underperforming their peers in Asia. Those investing in the stock market are about 2 per cent of the total population. The rich earning over Rs 2 crore a year are even fewer. The budget does not impose higher tax on the lower and middle-income citizens.
However, a lot of High Networth Individuals and traders belong to the two categories that have witnessed a significant upward revision in overall taxation. These categories play a significant role in the direction of the stock market.
For those people dependent on dividend income and income through capital gains, the overall taxation goes up due to the increase in the surcharge if one’s income is over Rs 2 crore a year. Besides, if one has a higher taxable income in a particular year via property sale or other capital gains, you end up paying more tax.
Many companies offered to buy back shares to avoid paying dividend distribution tax. The budget plugs this loophole and imposes a 20 per cent additional tax on share buybacks.
The government has also extended the benefit of a lower income tax rate of 25 per cent on firms with a turnover of Rs 250-400 crore. This covers over 99.3 per cent of the businesses. However, these are not listed companies that matter to investors. Companies that move the market are large ones. They belong to the 0.7 per cent remaining businesses that pay tax to the tune of 35 per cent on profits. There is no relief in tax to such firms.
The director at a leading financial services firm said overall tax on the rich is 42 per cent. “There is no incentive to capital formation,” he said. The need of the hour is to kickstart growth. For that, the rich have to invest more. But by raising taxes sharply, the Centre is giving little incentive to people with money to make new investment.
Columnist and founder, Simplus Information Services Private Ltd