Investors are currently closely monitoring developments ahead of Finance Minister Nirmala Sitharaman's budget presentation on July 23, against the backdrop of the ongoing Budget Session of Parliament starting on July 22. One of the primary areas of interest for investors is the potential changes in capital gains tax, which could have significant implications for market dynamics.
There has been longstanding demand from investors for rationalization and simplification of capital gains taxes. Any favorable adjustments in this domain are anticipated to bolster investor sentiment and trigger a rally in the stock market.
Chris Wood, the global head of equity strategy at Jefferies, indicated in his recent note "GREED & Fear" that there is currently less concern about an imminent increase in capital gains tax. He suggested that the recently re-elected government is unlikely to significantly raise taxes due to its diminished electoral mandate. However, he cautioned that if this expectation proves incorrect and taxes are indeed raised substantially, it could lead to a notable market correction.
Despite recent gains in equities, Wood believes India is still in the nascent stages of developing an equity culture. He highlighted the increasing participation of retail investors, a trend he expects to continue. Wood also advised against selling stocks during market corrections unless there are short-term or tactical reasons to do so.
Various experts and industry bodies have consistently advocated for a simplified and uniform capital gains tax regime to enhance transparency and ease compliance. One proposal under consideration is to increase the tax-free ceiling for long-term capital gains (LTCG) from the current Rs 1 lakh to Rs 2 lakh.
EY, in its analysis, has suggested that an overhaul of the capital gains tax structure is necessary, including potential changes in tax rates and computation methods. The firm recommends introducing a tolerance limit for normative taxation purposes in the transfer of unlisted shares, among other reforms.
Sudhir Kapadia, Partner-Tax & Regulatory Services at EY, emphasized the importance of rationalizing capital gains tax rates and achieving uniformity across asset classes to enhance India's global competitiveness. He proposed a 10% long-term capital gains tax rate for listed securities as a significant step forward.
Looking ahead to the budget, market expectations are high for potential tax relief measures and policy consistency. Manish Jain from m.Stock by Mirae Asset highlighted the need for continuity in policy and potential tax reliefs to simplify the complex tax structure currently faced by investors. He suggested that streamlining these taxes could encourage greater participation in the equity markets and support long-term economic growth.
Vinnaayak Mehta, Founder of The Infinity Group, mentioned expectations of a market correction due to current overvaluations in stocks and indexes. He suggested that a correction would offer buying opportunities once stocks reach more reasonable price levels, anticipating support from a potential rate cut by the Federal Reserve.
Overall, as the budget announcement approaches, investors and analysts are eagerly awaiting any changes in capital gains tax and other fiscal measures that could influence market sentiment and economic stability. The anticipated reforms aim to streamline taxation, curb speculative trading, and maintain policy consistency, all of which are expected to foster economic progress and market confidence.
