A Budget for markets

| Updated on January 23, 2020

While equity markets are on a sound footing, commodity exchanges can do with some help

The equity market is one segment of the economy that appears in good health. Market participants would be hoping that the Union Budget does nothing to upset the upbeat sentiment. Market benchmarks scaled new life-time peaks this month, foreign portfolio investors have purchased over $1.6 billion net of stocks and investments into equities through systematic investment plans continue. The markets were enthusiastic about the corporate tax rate cut in September 2019, that has already helped improve profitability of listed companies in the second and third quarters of FY20. The underlying activity in the exchanges appears robust.

The FM could help the long-term growth of equity market by rationalising some of the taxes levied on equity transactions. There is variation in the rates of Securities Transaction Tax on cash, futures and options transactions. The tax incidence on option traders is the lowest, making traders throng this segment. Besides this, the rate of STT of 0.1 per cent on both purchase and sale transactions in the cash segment is too high and can be calibrated. Retaining the STT, once long term capital gains tax was reintroduced on equity and equity mutual funds in 2018, is not entirely justified. However, some relief can be provided to those in the business of stock trading by restoring the rebate under Section 88E of the Income Tax Act. This can help stock brokers and full-time traders treat STT as tax paid and not as expense, thus reducing the outgo. Streamlining the holding period for qualifying for LTCG and the rate of this tax, across equity, debt and insurance is another exercise that can simplify taxation of investments. Equity investors will also be keenly watching the tone of the Budget — whether it does enough to boost consumption and capital expenditure or decides to focus on fiscal prudence. The latter can be a dampener to the ongoing bull-run.

Commodity exchanges are however still in the slow-lane and can benefit from some conducive Budget proposals. It is only now, after SEBI took over the regulation of these exchanges, that trading processes are being streamlined and investor trust regained. Trading on these exchanges can be encouraged through removal of the transaction tax on commodity trading. Since the introduction of CTT in 2013, volume in non-agri contracts has shrunk sharply. With the greater focus on making corporates hedge their input cost volatility through commodity exchanges, the FM could consider withdrawing this tax until the exchanges are up and running. The Budget could announce measures to set up spot exchanges for various commodities. With the physical markets for commodities being dispersed, price-discovery of the underlying, on which commodity contracts are based, is a challenge. In order to improve participation, banks can also be allowed to trade on these platforms. If the government too begins using domestic exchanges to hedge commodity price risk, it can boost the activity on these platforms.

Published on January 23, 2020

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