Here are 7 wishes of D-Street from Budget 2019 that will boost capital markets

Dhruva Advisors LLP

Capital markets play a pivotal role in the growth of the economy and development of the overall financial system. A vibrant capital market acts as a platform for bringing together investors with surplus capital and businesses with the need for capital to expand or improve their operations.

Development of capital markets has always been a key economic objective of developing countries like India.

As the new government prepares to present a Union Budget for FY20, the general public as well stock markets are expecting the government to provide incentives to those who are actually investing in the growth of the country and introduce measures to widen the base of capital markets in India.

The Government of India can boost capital markets in the following ways:

Removal of tax on Long-term Capital Gains (LTCG):

Re-introduction of LTCG tax has adversely impacted the capital market of the country as the investments in the country have become less lucrative and more volatile.

It has also complicated taxation structure on listed securities and equity mutual funds, which has affected sentiments of investors.

Now, removal of LTCG tax will help in channelling more funds to stock markets either directly or through mutual funds, and it will act as an incentive for attracting conventional investors who otherwise invest in gold, fixed return instruments, or real estate. It will help broaden the base number of market participants.

Removal of Securities Transaction Tax (STT):

Under current tax laws, in respect of equity-oriented funds, there is a double levy of STT, once at the time of sale of securities by mutual funds and again at the time of redemption by investors.

This double levy of STT adversely impacts the returns in the hands of investors and acts as a deterrent from investing in mutual funds.

STT should be completely removed in order to encourage participation and deepening of capital markets.

Benefit for unlisted shares offered for sale in an IPO:

Currently, promoters planning to list their companies are not entitled to the benefit of cost step-up of shares sold by them under Offer for Sale (OFS).

Given that the available money is chasing a limited number of stocks, it would be worthwhile to take steps that will help widen the market base. To meet this objective, the government may consider extending the benefit of cost step-up to OFS shares.

This may be done by providing that the book value of unlisted shares as on 31 January 2018 shall be considered as its fair market value (FMV).

This will widen the choice for investment in stocks and thereby avoid an unnecessary bubble in few stocks.

Increase of investment limit u/s 80C:

The government should consider increasing investment limit u/s 80C from Rs 1.5 lakh to Rs 2 lakh in order to encourage individual taxpayers to invest more in the capital market through Equity Linked Saving Schemes (ELSS) which will further push the capital markets.

Introduction of Debt Linked Saving Schemes (DLSS):

DLSS on the lines of ELSS shall be introduced to channel investments into the corporate bond market. Introduction of DLSS will motivate small investors to participate in the bond market at low cost and at lower risk which will ultimately deepen the capital market of the country. This shall also help to ease the liquidity issue the businesses are currently facing.

Providing option of capital gains schemes through lock-in based debt/equity schemes:

Options for investment-linked Capital gains tax exemption may be expanded by creating suitable schemes which will channel money into capital markets (through debt/equity mode) for a particular lock-in period.

Furthermore, the limit of investment in such units shall be increased to one crore rupees. This will encourage people to invest more depending on risk appetite and at the same time address the current liquidity issue.

Removal of Dividend Distribution Tax (DDT) and HNI tax on dividends:

One of the top priorities of the government is to attract investments (domestic as well as foreign) in order to boost business and create jobs.

One of the reasons investors are shying away from investing is the huge tax cost that is impacting their returns significantly. DDT is one of the major deterrents especially because it is not available as a tax credit and, in fact, dividends are further taxed in the hands of resident investors at 10 percent (HNI tax).

The government should move back to the old system of taxing the investors in their individual hands by reducing the tax rate as well as abolishing HNI tax on such dividend income. This will improve returns for investors and will ultimately attract more investors.

The above article was co-authored by Vishal Gada, Partner; Pankhuri Kapur, Senior Associates; and Zeel Gada, Principal from Dhruva Advisors LLP.