Need to plug bonus stripping, buyback gaps
ET CONTRIBUTORS|
Feb 02, 2018, 12.25 PM IST
By Nilesh Shah
This Budget has focused on deepening capital markets. Mandating 25 per cent of borrowing by large companies through capital markets will bring more issuers to market. Mandating investment up to A rated paper instead of AA rated paper allows more options to lower-rated borrowers. Listing 40 PSEs for divestment and 24 PSEs for strategic divestment brings the supply necessary to cool the equity market. Using InvIT (Infrastructure Investment Trust) kind of structure to monetise operating assets will release capital to the government to make fresh investment and bring long-term money in the market.
A comprehensive policy on gold as an asset class can make more than a trillion dollars worth of frozen savings available, reducing reliance on foreign capital. Launch of debt ETFs will open up new funding avenues for the government as well as investment avenues for investors.
Levy of long-term capital gains (LTCG) on equity assets is done in a very fair manner with grandfathering of all gains up to January 31, 2018.
There are few steps required to make it more effective: While grandfathering solves the issue of past securities transaction tax (STT) paid, going forward, a taxpayer will be exposed to both LTCG and STT. This will be double taxation. The gap between short-term capital gains (STCG) and LTCG now stands at 5 per cent. This does not provide sufficient incentive for an investor to hold securities to claim LTCG. A graded LTCG eventually widening the gap between STCG and LTCG even over a 5-year period will push the taxpayer to be an investor rather than a trader. There are two loopholes of bonus stripping and buybacks which impact government's revenue collection and have remained untouched in the Budget.
Taxpayers having STCG buy cum-bonus equity shares and sell ex-bonus to claim STCL (shortterm capital loss) to offset their STCG and save tax. The buyback also allows investors to avoid paying dividend distribution tax. If these loopholes are plugged then government will get necessary tax revenue to replace STT.
The debt and equity market have reacted differently. Benchmark 10-year yield is up by 15 bps to 7.60 per cent on fear of higher inflation due to increase in MSP and potential slippage in fiscal deficit.
The equity market, on the other hand, has taken comfort from the expected increase in tax collection through better tax compliance and accelerated growth from support to rural economy. How the government executes the vision demonstrated in the Budget will determine which market has priced the Budget correctly.
(The author is the Managing Director, Kotak Asset Management. Views expressed are personal.)
This Budget has focused on deepening capital markets. Mandating 25 per cent of borrowing by large companies through capital markets will bring more issuers to market. Mandating investment up to A rated paper instead of AA rated paper allows more options to lower-rated borrowers. Listing 40 PSEs for divestment and 24 PSEs for strategic divestment brings the supply necessary to cool the equity market. Using InvIT (Infrastructure Investment Trust) kind of structure to monetise operating assets will release capital to the government to make fresh investment and bring long-term money in the market.
A comprehensive policy on gold as an asset class can make more than a trillion dollars worth of frozen savings available, reducing reliance on foreign capital. Launch of debt ETFs will open up new funding avenues for the government as well as investment avenues for investors.
Levy of long-term capital gains (LTCG) on equity assets is done in a very fair manner with grandfathering of all gains up to January 31, 2018.
There are few steps required to make it more effective: While grandfathering solves the issue of past securities transaction tax (STT) paid, going forward, a taxpayer will be exposed to both LTCG and STT. This will be double taxation. The gap between short-term capital gains (STCG) and LTCG now stands at 5 per cent. This does not provide sufficient incentive for an investor to hold securities to claim LTCG. A graded LTCG eventually widening the gap between STCG and LTCG even over a 5-year period will push the taxpayer to be an investor rather than a trader. There are two loopholes of bonus stripping and buybacks which impact government's revenue collection and have remained untouched in the Budget.
Taxpayers having STCG buy cum-bonus equity shares and sell ex-bonus to claim STCL (shortterm capital loss) to offset their STCG and save tax. The buyback also allows investors to avoid paying dividend distribution tax. If these loopholes are plugged then government will get necessary tax revenue to replace STT.
The debt and equity market have reacted differently. Benchmark 10-year yield is up by 15 bps to 7.60 per cent on fear of higher inflation due to increase in MSP and potential slippage in fiscal deficit.
The equity market, on the other hand, has taken comfort from the expected increase in tax collection through better tax compliance and accelerated growth from support to rural economy. How the government executes the vision demonstrated in the Budget will determine which market has priced the Budget correctly.
(The author is the Managing Director, Kotak Asset Management. Views expressed are personal.)
