LTCG returns! It will affect market sentiment: Experts
LTCG deriving from transfer of listed equity shares, units of equity oriented fund, and unit of a business trust are exempt from tax.
In Union Budget 2018-19, Finance Minister Arun Jaitley's announcement to tax LTCG has stunned both markets and investors.
The Finance Minister proposed to tax LTCG exceeding Rs 1 Lakh at the rate of 10% without allowing the benefit of any indexation, saying “All gains up to 31st January, 2018 will be grandfathered.”
A tax on distributed income by equity oriented mutual fund at the rate of 10% was also proposed for providing level playing field across growth-oriented funds and dividend distributing funds.
Currently, LTCG deriving from transfer of listed equity shares, units of equity oriented fund and unit of a business trust are exempt from tax.
Investors have taken advantage of this exemption, tapping Indian markets to whole new level presently.
Over the past two-fiscal, the benchmark indices have continued to surge, clocking new heights with Sensex at 36,406.88-mark and Nifty at 11,163.55-level.
The S&P has surged 45%, while the Sensex has surged 46% in rupee terms and 52% in dollar terms, said the survey.
Similar was the case of mutual fund industry.
According to the data showed by Association of Mutual Funds in India, the MFs asset under management (AUM) which stood at mere Rs 10 lakh crore in mid-2014 - jumped to Rs 21.27 lakh by end of December 2017.
Also, net inflow in equity mutual funds was at Rs 1.32 lakh crore in 2017 - more than doubled compare to Rs 51,000 crore in 2016.
As per the returns filed for A.Y.17-18, capital gains from the listed shares and units is around Rs 3,67,000 crores and the major part of this gain has accrued to corporates and LLPs.
The Finance Ministry explained that this has created a bias against manufacturing, leading to more business surpluses being invested in financial assets.
“The return on investment in equity is already quite attractive even without tax exemption. There is therefore a strong case for bringing Long Term Capital Gains from listed equities in the tax net,” Jaitley said.
The decision comes as a surprise for market experts, who were hoping increase in short term capital gains on stock exchanges for 3 years. Now, many experts are in two opinions considering the changes brought under Budget FY19.
Firstly talking on positives, the grandfathering of equity investment till January 31, 2018, is taken as a good sign.
Kaustubh Belapurkar, Director - Manager Research, Morningstar Investment Adviser India, said, “Grandfathering of capital gains (realized or unrealized) till 31st Jan 2018, is a positive move as this should ensure there is no major knee jerk selling in the market.”
Belapurkar highlights that exempting gains below 1 lakh from LTCG ensures that the smaller investors will end up paying minimal tax, thus in that respect retail investors shouldn’t be too spooked by this move.
Dinesh Rohira, Founder & CEO, 5nance.com, sees this move as narrowing the gap between investing for a long term and booking timely profits.
Rohira said, "As an investment advisers we have always been an advocate to the merits of Exit advisory to be in place for the investor. It will hold a key to the meaningful investment strategies."
Dividends from equities and equities mutual funds are also covered under the tax net. Rohira says, "More systematic approach through SWP will gain the grounds over taking the dividend benefits."
"This move has clearly laid down the path for the consumer centric approach and a paradigm shift from time based to goal and return based exits from the investments," he adds.
Coming to negatives, experts have taken LTCG’s return as a negative factor and a major dampener for the growth of Indian market. They believe this will also reverse investors optimism for equities and mutual funds.
Introduction of 10% Dividend Distribution tax (DDT) on dividend options of equity funds is seen as impacting flows into funds where investors were primarily entering with the expectation of regular dividends.
Belapurkar says, "Infact dividend schemes are now slightly disadvantaged as opposed to growth schemes as LTCG below 1 lakh is exempt from tax."
Belapurkar further adds that this could lead to confusion/creative accounting regarding how grandfathered gains are accounted for when actual gains are realized.
In MorningStars' view, if the LTCG tax had to be tweaked, increasing the holding period from 1 year to 3 years for LTCG would have been a better option.
Also, equities clearly are not a one-year investment option and by increasing the holding period for LTCG eligibility would have improved holding discipline amongst investors.
Meantime, investors wishing to book gains within 3 years would have paid 15% Short Term Capital Gains (STCG) Tax which would have added to tax collections, as per MorningStar.
Currently, if a person who sells equity shares listed on stock exchanges within 12 months of his buying, he enters into short term capital gain which comes under tax net.
Raghvendra Nath, Managing Director, Ladderup Wealth Management, said, "Introduction of LTCG while keeping the STT unchanged is double impact on Equity Market investors. Something that could have been avoided considering that Equity Markets are an engine of growth.
From above mentioned views, it can be stated that the budget was meant to low benefit of holding a stock for more than 1 year which should lead to higher trading by market participants.
Abhinav Gupta, VP, Capital Market, Share India Securities Ltd, said, "The tax would impact sentiment in negative effect which would be completely priced in over the course of next few days. This would certainly reduce the flow of domestic money through SIP route in second half of the year."
Systematic Investment Plan (SIP) option is likely to see a rapid rise in mutual industry - witnessing Rs 6,200 crore in December 2017 - up by a whopping 56% from a year-ago period.
AMFI's data revealed that total money garnered in SIPs has increased to over Rs 59,000 crore in 2017 as against investment of Rs 40,000 crore - reflecting the appetite for mutual funds.
Moreover, the STCG will continue to be taxed at 15% rate on distribution of equity oriented at 10%, which according to Macquarie this will hurt the dividend from MF options.
Considering the above factor, Morgan Stanley showcases cautions on Sensex, as this index may come near 32,000 by end of December 2018.