Dr. Sanjiv Agarwal

Union Budget 2012-13 could not lift the sentiment of the capital markets in India as the markets do not seem to be influenced or moved by the budget proposals, which are otherwise also not directly in favour of capital market.

This is because the market sentiment as the expectations on abolition of securities transaction fax (only marginal reduction proposed), sops for mutual funds, fresh investments by way of foreign direct investments, encouragement to IPOs etc. could not be addressed. Infact foreign investors have already started moving to economies like Egypt, Turkey and Indonesia where they feel that returns would be better as compared to India or China. Income tax amendment from retrospective date of 1962 to reverse  Supreme court judgment in  Vodafone case  also add to negative market sentiment and will affect FDI.

Budget Pluses for capital market

–         STT reduced

–         Rajiv Gandhi Equity Scheme

–         (Details to be announced)

–         Discontinuation of deduction on infra bonds

–         IDR’s simplified

–         Steps for shareholder democracy

Budget Minuses for capital market

–         STT not abolished

–         Nothing for mutual funds

–         No encouragement to IPOs.

–         Infrastructure bonds will take away 60K crore.

–         Tight liquidity to affect bank’s treasury operations

 In proposed Rajiv Gandhi equity savings scheme, funds will pour in due to its attraction of 50 percent tax deduction to those who invest upto Rs. 50,000 directly in equities and whose annual income is below Rs. 10 lakhs. This would mean an effective deduction of Rs. 25000 from gross total income. However, deductions on investment in infrastructure bonds has been discontinued from April 2012. Also in new scheme, investment with over Rs. 50,000 or by those having income of more than Rs. 10 lakh can not be made. Equity being a risky proposition, its success can not be commented upon.

The relief for investment upto Rs. 20,000 in infrastructure bonds was available only upto March, 2012. This was over and above the limit of Rs. one lakh under section 80C of the Income Tax Act, 1961. This benefit has not been extended. This investment allowed investors is save Rs. 4000 and Rs. 6000 of income tax in 20% and 30% slabs respectively. Thus, this deduction remained on statute books only for two years and its non-extention beyond 2012 is not justified, as the emphasis of the budget was on infrastructure development only. Moreover, in creasing the amount of infra bonds to be raised from Rs. 30,000 crore to Rs. 60,000 crore on one hand and with drawl of tax benefit on investment in bonds is not logical. It could have been better to continue with infra bonds deduction benefit or rather enhance the limit from Rs. 20,000 to Rs. 50,000 rather than introducing a new Rajiv Gandhi equity scheme. The proposal is therefore retrogatory as it will hit the taxpayers as well as adversely affect inflow of funds in infra sector via retail route.

Now foreign investors are also allowed to access Indian corporate bonds market. It is also proposed to simplify IPO process and reduce its cost. All IPOs of Rs. 10 crore or above will now be through a nation wide electronic broker network which will deepen the market reach. To have more foreign participation through Indian depository receipts (IDRs), two way fungibility is proposed. In order to have under shareholder participation in corporate decision making, top listed companies will have to have electronic voting facility so that shareholders can participate in meetings without their physical presence. This certainly is a welcome move and already provided for in Companies Bill 2011. This will also improve good governance practices.

In order to reduce transaction costs, securities transaction tax (STT) has been proposed to be reduced form 0.125 % to 0.1 % but only on cash delivery transactions. Such transactions are now a days not much. On the other hand, Service Tax on brokerage and all market related fees will go up by 2% adding to the transaction costs.  However, service provided by sub broker to a stock broker, any authorized person to a member of commodity exchange and a mutual fund agent or distributor to mutual fund or asset management company find plane in exempt services. Such services were earlier also either exempt or taxable under reverse charge mechanism. Since the exemption will also apply to non individuals, even corporate / bank agents or brokers will also benefit. Earlion mutual funds used to deduct Service Tax at applicable rate from the commission or incentive payable to distributors / agents and it was not covetable and absorbed as expense. Mutual fund industry may tend to gain out of this move as their marketing network will get incentivesed.

On the fillip side, general rate hike in Service Tax and Central Excise will dampen the market sentiment. This may also result in lower dividend payout. The budget, on one line, does not provide the desired impetus to market and is not good so far as markets are concerned. However, if the economy grows, market too will go up.

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