The union budget 2020 has its importance as the economy is going through the worst slow down since the global financial crisis of 2008.
Over the years, the union budget has increasingly become less important for the long-term equity investors (1991-92 budget speech by Dr Manmohan Singh stands out in that context). Several policy decisions impacting the economy and thereby equity markets have moved out of the budget like, post the GST implementation indirect tax changes have moved out of budget and are now within the purview of the GST council.
However, the union budget 2020 has its importance as the economy is going through the worst slow down since the global financial crisis of 2008. This macro sluggishness is also getting reflected in broader stock market (though Sensex is not reflecting the fact due to flight to safety in the top 5 index-heavyweights).
The government has taken some steps like corporate tax cuts and $1.4 trillion infra spend over the next five years. Most of these will be beneficial over the long term and mostly on the supply side, but the problem is the near-term consumer demand. Any steps to prop up the near-term consumer demand like personal tax cuts would be helpful for the consumer discretionary sectors like auto and white goods.
Another sector which is witnessing a sharp slowdown is the real estate sector. Also, steps like increasing the size of tax deduction for home loan interest for individuals will be helpful in reviving demand for residential real estate. Public sector companies have seen a correction in valuations due to the government intervention in the capital allocation policies (For example, ONGC acquiring HPCL).
A clear road map on how the government plans to reduce its influence on the decision making of these companies will help in reviving investor interest in these names. Furthermore, removal of tax levied on long term capital gains on equity investments will also improve the investor sentiments. In the year 2019, retail investors have continued to remain buoyant with their SIP investments in spite of the market volatility and rupee devaluation.
As far as my expectations are concerned, I think the one thing I always wanted from the budget is to revise the definition of “equity oriented funds” (EOF) by including fund of funds (FOF) schemes which invest predominantly – that is, 65% or more in units of equity oriented mutual fund schemes. My wish list continues and my second point is, a tax exemption on lines of NPS to investment in retirement benefit/pension schemes that may be allowed to be launched by mutual funds.
I would also request that the units issued by mutual funds that are registered with Sebi, with a lock-in period for three years and where the underlying investments are in equity or debt of ‘infrastructure sub-sector’ as specified by RBI Master Circular in line with ‘Master List of Infrastructure sub-sectors’ notified by the Government of India, be also included in the list of the specified long-term assets and may be notified as “Long term specified assets” under Section 54EE. This will help for exemption on long-term capital gains.
Further, to bring uniformity in taxation of investment in mutual fund schemes and ULIPs of insurance companies, I would like to suggest that in case of intra-scheme switches (switching of investment within the schemes of the fund house and intra-fund house) should ideally be exempt from payment of capital gains tax. Investors should be given full freedom to choose (or switch) their investments without any conditions applied as is applicable to ULIPS.
Moreover, capital gain tax should also be exempt on equity schemes in general. While equity mutual funds have the potential to help investors achieve their financial goals, taxes are dispiriting. Similarly, removal of STT has been long in our wish-list. Mutual fund investors are required to pay STT every time they invest and the mutual fund pays STT on the Investment Portfolio of the underlying scheme. We hope the government will abolish STT that is being charged at the time of redemption of equity mutual funds.
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