An oppressive miasma of hike in tax rate on capital gains from equity investments hung in the air leading to a knee jerk fall in Sensex and Nifty but the Modi government's prudent fiscal deficit management is likely to cheer the stock markets in the coming days as the numbers beat the street expectations. Budget documents show that the government expects 70 percent higher dividends from the Public Sector Unit (PSU) companies at around Rs 2.9 lakh crores versus 1.70 lakh crores it got in the previous year. These details are given in the non tax revenue receipt estimates in the document. Higher dividends from PSUs could be the biggest good news that could cheer the stocks of public sector companies.
Finance Minister Nirmala Sitharaman estimated the fiscal deficit at 4.9 percent of the GDP for financial year (FY) 2025 versus earlier estimate of 5.1 percent in the interim Budget in February. Markets were expecting the FM to project FY25 fiscal deficit at 5 percent. India's fiscal deficit during FY21, FY22 and FY23, was 6.7 per cent, 6.4 per cent and 5.9 per cent to the GDP respectively, which has now come down to 4.9 percent for FY25 and is projected at 4.5 percent for FY26. In FY 24, the fiscal deficit was 5.9 percent. Fiscal deficit means the difference between the government expenditure and income.
Another good news is that the government will also reduce its gross borrowings by around Rs 9,000 crores, which is a positive as it indicates the government's astute money management. For FY 25, the FM said gross and net market borrowing is expected to be Rs 14.01 lakh crore and Rs 11.63 lakh crore respectively. Earlier, the gross borrowing was expected to be around Rs 14.09 lakh crores. "From 2026-27 onwards, our endeavor will be to keep a fiscal deficit each year such that the central government's debt will be on a declining path as a percentage of GDP," the finance minister added.
The Sensex had declined by more than 1200 points while the Nifty was down by over 450 points when the FM announced a hike in capital gains tax and Securities Transaction Tax in her budget speech. But by the end of the trading session, the markets had recovered fully as they focused on other positives in the budget. The Nifty index closed at 24,479 while the Sensex closed at 80,429.
Capital Gains Tax: A Sentiment Spoiler
The FM hiked tax tax on capital gains made from long term equity investments and short term trading. Long Term Capital Gains Tax (LTCG) has been hiked to 12.5 percent from 10 percent earlier while the Short Term Capital Gains Tax (STCG) was hiked to 20 percent from 15 percent. Experts are of the view that no doubt this could pinch the stock market traders but sentiments would adjust in the coming months as people come to terms with it. Prior to 2018, India did not have any LTCG but suddenly the Modi government imposed 10 percent tax in the 2017 budget. The stock markets had crashed by 17-18 percent in the coming months following this imposition of tax. But if the overall market scenario remained good due to government's astute measures and higher corporate earnings, the markets would shrug off the negative on LTCG and STCG hike. To soften the blow, the FM announced a hike in the LTCG exemption limit to Rs 1.25 lakh per year.
Also, the government has hiked the securities transactions tax (STT), which is collected by the government irrespective of profit or loss, by 60 percent on futures and options (F&O) trading. According to the brokers, a hike in STT will bring down derivative trading volumes as high frequency traders that provided liquidity to the markets will be hit badly. The FM increased the rates of STT on sale of an option in securities from 0.0625 per cent to 0.1 per cent of the premium and on sale of a futures in securities from 0.0125 per cent to 0.02 per cent of the price at which such futures are traded.
"Hike in stock market related taxes was expected. Trading volumes will be impacted but that is the way of life. The logic behind this seems that the government is saying that in the long term taxes on capital and labour should be at par. But while the tax on capital is being hiked, the reduction of taxes on labour is not happening," said Rajesh Behati, MD, Crosseas Capital.
