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Finance Minister Nirmala Sitharaman presented the Union Budget 2024 on Tuesday, July 23rd. The Budget, touted as a crucial indicator of the government’s economic policies, drew attention from experts and analysts.
In an interview to CNBC-TV18, Sunil Singhania, Founder of Abakkus Asset Management; Madhu Kela, Founder of MK Ventures; Nilesh Shah, Managing Director of Kotak Mahindra Asset Management; Prashant Khemka, Founder of White Oak Capital Management; Dinesh Kanabar, CEO of Dhruva Advisors; Ashok Wadhwa, Group CEO of Ambit, gave their take on Nirmala Sitharaman’s seventh consecutive budget and their outlook on the road ahead.
Below are the excerpts of the discussion.
Q: This was being speculated whether this is going to be the budget that finally moves as far as capital gains simplification is concerned. Your reactions on what we heard from the FM?
Wadhwa: The increase in capital gains tax on listed securities is a bit of a disappointment. We were all hoping that they will keep it intact and retain market buoyancy but I guess as the Economic Survey had mentioned, government wanted to make a move.The distinction is that they are trying to save for the smaller person. In other words, the lower middle class – they have increased the exemption from Rs 1-1.25 lakh, they have reduced that tax rates, so in a sense they have provided some comfort there. But, to the market participants, it is 10 going to 12.5, 15 going to 20 on listed stocks.Only partial good news is that they have therefore for the unlisted securities, they have brought the capital gains tax down. So where we were taxing long-term at 20%, that will come down to 12.5% and where we were taxing short-term 25% or 39% depending upon whether it was a corporate or an individual, they have brought it down to 20%.What we don’t know is what they have done with real estate because that didn’t come out very clearly in the messaging.So that is unfortunate but par for the course now.
Q: What were the big takeaways on tax.
Kanabar: Quite a few things. Angel tax going away will mean that huge amount of money which was coming in, and we were seeing some horror stories, although there was a lot of liberalisation in the recent part, but still there were horror stories.Again, buyback tax, and we discussed this just before the budget was presented, that be careful what you wish for. So it's not being treated as capital gains, it's going be tax in the hands of the recipient, which would mean that it could actually be in the hands of larger taxpayers, mean a larger share of tax being paid, but it will be taxed at a full rate. So that's what it's going to mean. So for lower income people, it's going mean good. For those who are at a higher tax bracket, it's going mean higher taxation.
Q: The arbitrage between dividends and buybacks in that sense also goes away?
Kanabar: Goes away, absolutely.
Wadhwa: Except Dinesh, are they going to tax buyback on long-term holding as capital gains, because if they are going to tax it in the hands of the individual, and it is then taxed as capital gains tax, then the 20% comes down to 12.50%. Because today, the company’s paying a tax at 20%. But if it's going to be taxed in the hands of the individual, it has to be taxed in the individual as the character. And if the character is long-term, it doesn't matter whether you buy it or the company buys it. If the character is long-term, then it'll be 12.50%. So then there's a gain. The company was paying 20%. The individual would be paying 12.50%.
Kanabar: Ashok, we will have to see the fine print. You are right, actually, it's not long-term or short-term, it's the characterisation. So if the characterisation is capital gain, then obviously, whatever is the capital gains treatment will apply. If it is treated as normal income, then we have a challenge. So we will have to examine that.
Q: The speculation was ripe, especially over the last few weeks that something has got to give as far as the capital gains regime is concerned. It has now been put forward in the budget and of course fine print is awaited. Your first reaction to what we've seen the finance minister deliver?
Singhania: I think the market reacts based on expectations and what actually comes out. I would tend to agree that there was hardly anyone who was expecting any change in the capital gains regime at least in this Budget because we are only six months away from the next budget. So I think to that extent there has been a disappointment and the other thing is uncertainty on this buyback tax because the intention of the finance minister maybe was that dividend tax and buyback tax, there was a difference in tax treatment and buybacks were getting maybe a slightly more benefit in terms of lower taxes. So we have to see the fine print, but obviously when something is not expected, the market definitely reacts. Anyways, I think over the last 10-15 days’ market was showing signs of cooling off, at least the broader market. So while the nifty was not showing signs, the broader markets was clearly showing signs of overheating. So it's a combination of two factors I would say.
Q: The market’s worst fear realised with short-term capital gains (STCG) going up to 20%.
Kela: This is completely not in expected lines. I do not think any market participant was expecting a change in the short-term capital gains as well as in the long-term capital gains regime and also the securities transaction tax (STT) being increased and the buyback taxation, if it is moved from company to the individual then there is no charge to the company then it will be incrementally positive. But by and large, to me on a lighter sense, it looks like the government want the market to cool off and while the fiscal math was adding, this was not the basic expectation of the taxation increase. And already markets have runoff hard in the last few months, so some kind of a correction because of this is not overruled and that is what the markets are showing off.
Q: From an attractiveness point of view, purely on a taxation regime basis, how does this capital gains tax increase account in your opinion?
Prashant Khemka, Founder, White Oak Capital Management: From an investment perspective, this budget - after a few budgets - is a bit more negative I would say on the taxation front in particular. There were some expectations that a long-term capital gains tax might be increased but with indexation benefit. Tooday what we have seen is that – there isn’t an indexation benefit plus it increases the risk. In a way, there was a stability in the capital gains regime for the last several years. Now, the long-term gains tax has been raised by only 2.5%, short term raised to 20 but this increases the risk in investors’ mind that given tax regime for next many years, it is possible that this could be inching up higher again at some point in time.
That is negative but that is the primary negative of the budget, there are several positives as well.
Most particularly, on the review of the tax which would simplify and make it easier to comply with.
