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Stock markets crashed on Saturday as Finance Minister Nirmala Sitharaman failed to offer any effective fiscal stimulus to revive economic growth. Immediately, the focus shifted to global markets and negative sentiment due to fears over coronavirus, experts told BusinessLine .
The Sensex crashed by 2.43 per cent or 987 points to close at 39,735. Nifty fell by 2.5 per cent or 300 points at 11,661.
Share prices of most banks that promote insurance companies were hit as the Budget announced a new tax regime for individual tax payers, without exemptions on investments. Nearly 50 per cent of earnings for the benchmark Nifty index come from the banking sector. The new tax regime spread fears that sale of insurance policies will be hit if people did not feel the compulsion to buy them for saving taxes. The Budget said that individual tax payers can shift to a regime with lower taxes on certain brackets but in that case all tax exemptions on investments will go. Tax savings was a plank on which insurance companies largely sold their policies.
“The markets seem to have read it wrong that everybody will shift to the new tax regime. Calculations show that most people will end up saving more tax if they stuck to the old regime and hence, the panic was unwarranted. But the Budget fell short on giving immediate major triggers for reviving growth and the focus is now back on global markets,” said Rahul Arora, CEO, Institutional Equities, Nirmal Bang.
LTCG expectations belied
Markets were expecting a complete roll back of long-term capital gains (LTCG) tax, which was introduced in the 2018 Budget and dividend distribution tax (DDT). LTCG stays and DDT will be taxed in the hands of the recipient.
“Abolishing DDT and taxing it in the hands of the recipient will result in higher tax outgo for many retail investors. Currently, the effective DDT rate stands at 20.35 per cent (including surcharge and cess). This will substantially increase the tax outgo for retail investors in the higher tax slab(s) of 20 per cent (and more) and, accordingly, taken negatively by the equity markets. Even the holding companies could be adversely impacted on the tax outgo for the dividends received from their subsidiaries or investee companies,” said Gaurav Dua, Senior V-P, Capital Markets and Investments, Sharekhan-BNP Paribas.
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