6 mins read . 31 Jan 2023
There are many parameters to judge a Union Budget. One of the parameters is how positive it is for the capital markets. Let us say, how good it is for the stock trader. This goes beyond the impact of union budget on Indian stock market or on the indices like Nifty and Sensex. It is not even about the best stocks for 2023 or the best stocks to invest in 2023. The stock trader lies at the apex of the capital markets an unless the budget keeps them happy, any positive announcement is unlikely to percolate down to the lowest common denominator in the stock markets.
The budget impact on stock market will be judged based on whether the traders and stock markets have something to cheer about. That is one of the key aspects to understand when we look at the union budget impact on stock markets.
The stock market does not operate in a vacuum but in the overall macro ecosystem. Hence, the stock market traders will look for a budget where the fiscal deficit is brought down progressively but rapidly. Possibly, fiscal deficit must be pegged at 5.8% for 2023-24 with a glide path towards 4.5% in a maximum of 3 years. Also, reduction in subsidies and an increased focus on capex would also be value accretive for the stock traders. The government will also look at measures to reduce inflation to manageable levels.
Taxes have a strong influence on the stock market performance. Most of us would recollect how the markets reacted negatively to the 2018 budget which reimposed long term capital gains. How can Budget 2023 get the taxation narrative right for the capital markets. It must be clear that STT is unlikely to be scrapped or even reduced. At $3 billion revenue contribution, STT is a virtual cash cow. However, the government can remove the tax on long term capital gains from 10%. It is a flat tax without indexation and can have a deep impact on long term wealth creation. More importantly, the dividends are now taxed in the hands of the investor at the peak rate applicable. It is time to revert to zero tax on dividends to avoid double taxation. Probably, a nominal 10% tax on HNI dividends is still acceptable, but not across the board tax on dividends.
No capital market narrative is complete without putting money in the hands of the people. Budget 2023 is widely believed to raise the basic exemption limit to Rs5 lakhs to simplify the structure. Also, the Section 80C at Rs1.50 lakhs has outlived its utility and that limit needs to be raised to Rs3 lakhs, with a separate additional allocation for ELSS funds to encourage the equity cult in India. Another section that will put more money in the hands of people is Section 24, which is stuck at Rs2 lakh per year. This must be raised to Rs4 lakhs to make the home loan tax exemption more meaningful, in sync with market prices and also put more money in the hands of people. Also, peak tax rates for higher income groups are nearly 44%, which is more than any other comparable country in the world. A lot of purchasing power can be released from the creamy layer.
There are some of the minor bells and whistles in the capital market that need fixing. For instance, the amount paid as securities transaction tax (STT) is not available as a rebate when calculating the capital gains. That benefit is only available if the taxpayer files the returns by preparing the statement of accounts. Since STT is a sizable cost, it is only fair to offer than as an admissible expense. There is also the issue of intraday trading gains and losses being treated as speculative transactions. This is ironic since transactions in futures and options are not treated as speculative income. The government must seriously consider whether it is appropriate to treat intraday transactions as speculative income or as short term capital gains. Hopefully, all or some of these moves in the Union Budget 2023 should keep the trader and investors in the stock market a lot happier.