What Equity markets expect from the Finance Minister? 

The Finance Minister and her team have been conducting hectic parleys with the various stakeholders on Union Budget expectations. Here is what the capital markets would broadly be expecting.

Push to the reforms process

 Any capital market expectation starts off with the reforms process. Despite the upcoming state and general elections, the FM must sustain the reformist tone of the Union Budget. That means, focus must be on market-friendly reforms, on cutting down the fiscal deficit, reforms on the banking and financial sector front as well as greater reforms on boosting investments into India. Being the last full budget, the FM has to ensure that the focus on reforms is not lost.

Dividends and buybacks

This has been a contentious issue over the last few years. Now, dividends on equity shares as well as dividends on mutual funds are being taxed at the peak rate. This amounts to double taxes as dividends are a post-tax pay-out to the shareholders. One thing the Budget is considering is to shift the incidence of buyback taxation on the investor, which is a good move. However, in that case, the taxes on dividends must be also reduced to comparable levels. Budget 2023 is expected to take steps in this direction of making dividends more tax friendly to investors. The Budget can at least start off with equity mutual funds.

Addressing capital gains

At the outset, demands for scrapping of STT on equity transactions are largely out of sync with reality. It is generating nearly $3 billion for the government and is unlikely to go away. While the short term capital gains tax is acceptable, it is the flat LTCG of 10%, that is the main issue. According to government reports, the LTCG has not been contributing in a big way to the coffers. Also, the STT was introduced in lieu of LTCG, so there is no justification to bring back LTCG when STT still exists. Also, long term gains on MFs has a negative impact on financial planning and long term wealth creation through equity funds. That is something the budget must address, and, it is also very likely to address.

Make it worthwhile for FPIs

One major concern in the stock market in the last year and half has been the incessant FPI outflows. However, there are certain steps the government can take to stem these outflows. The FPI empanelment process can be simplified to a great extent to attract fresh FPIs into India. Secondly, the contentious issue of retrospective tax is still a major overhang for the FPIs. While specific issues like Vodafone have been resolved the issue is still open. Today, India has to compete with other EMs for global funds. The inclusion of Indian bonds in the global indices is pending. A move in that direction would certainly help!