Indian investors in 60% tax bracket; Budget must not add to the burden

The Union Budget is a process of digging one hole to fill another. The smartness is in digging a hole smoothly so that it does not hurt.

Many of the industrial sectors, be it FMCG, automobile, real estate, banking or NBFC, and other stakeholders such as investors, farmers and exporters are in trouble and want something from the Budget. The government must be looking at some place from where it can fulfil these aspirations. But there is no easy way out for the government.

From that angle, I think this Budget is going to be a disappointing one. The government is likely to take two important steps to increase its revenue: curb black money and bring as many people as possible from all sections of society (upper class, middle class or lower class) into the tax net.

The infrastructure sector is likely to get preferential treatment and the government may bring in reforms to revive this sector primarily for two reasons: first, we have a huge infrastructure deficit, and secondly, it can help create jobs and work as a GDP enabler. Job creation is the biggest challenge that this government has been facing.

Unfortunately, there are barely two-three companies in India that can complete a single project of Rs 5,000 crore or more on their own. The government needs to attract large corporate houses, else they will have to keep relying on foreign companies.

The government is becoming strict and is bent on not bailing out sick and inefficient businesses. Therefore, it is very likely that it will be a year of defaults and chaos. At the same time, the government is left with no choice but to disinvest inefficient PSUs. Incidentally, almost every PSU is inefficient compared with their private sector peers.

Curbing black money, bringing more people under the tax net and infra spending through the PPP model are likely to be the key highlights of this Budget.

Coming to the stock market, over 95 per cent investors, including me, are going through a tough time. Wealth has been eroded significantly over the past two years. The primary indices have been deceptive. Only a few stocks on the indices are doing well, and the rest are at two-three-five year lows. The primary index does not portray the real health of the economy and state of investor wealth.

Over 95 per cent investors do not invest in index companies, which have turned very expensive. There is a fair chance that the primary index will get corrected in line with the situation of the economy.

The government has an agenda of bringing all asset classes under one tax bracket. It doesn’t have the room to bring taxes on other asset classes like gold or bank fixed deposits or real estate to the level at which gains from equity are taxed.

So the only option left is to raise long-term capital gains, or LTCG levy, on equity from 10 per cent to say 15 per cent or 20 per cent. The moot point is, when? Raising it this year will be a suicidal attempt. If looking at the primary index levels, the government raises LTCG tax on equity gains to the levels that other assets are taxed at (which means from 10 per cent currently to say 20 per cent), then be prepared for a 15-20 per cent fall in the market.

Outsiders think it’s very easy to make money in the stock market. They should know that the ‘stock market is a platform to make easiest money in the hardest way.’

Stock investors already pay taxes in the highest brackets. They get dividend from a company after it is taxed at 30 per cent. Then the company needs to pay 20 per cent dividend distribution tax and then the investor pays a further 10 per cent tax plus surcharge on dividend income of above Rs 10 lakh. This is ridiculous.

In stocks, dividend yield is hardly 2 per cent, but capital risk is 100 per cent. If the government wants to revive the equity market and equity culture, it has to rectify these anomalies.

Another most important part is to see how the government tackles slowdown in the economy. Moral of all sections of society, be it investors, industrialists, farmers or merchants are at an all-time low. I don’t know how far the Budget can help lift sentiment, but it is the need of the hour. Half the slowdown in the economy has been due to weak sentiments.

This is a challenging year for Indian companies and the economy. But it is not that this has happened for the first time. We face such situations once in every decade. I am staying put in all my investments, as I feel, this too shall pass.

It reminds me of the song...

Manzilo pe aake lut te hai dilo ke karavaan,

Kashtiyaa saahil pe aksar, doobti hai pyar ki.

(Vijay Kedia is a well-known value investor and MD of Mumbai-based Kedia Securities)