Dalal Street hopes for market-friendly measures from new Modi govt

The capital market has given a thumbs up to Narendra Modi’s re-election as prime minister. Benchmark indices ended at new highs on four of the last six trading sessions. During the first tenure, the Modi government made a couple of key policy changes targeting stock market investors. These include the re-introduction of tax on long-term capital gains (LTCG) and higher dividend distribution tax (DDT). Having shallowed the better pill, investors are now hoping for market-friendly measures from the Modi government. Here are policy measures taken by the Modi government and how it has changed investor behaviour:

Reintroduction of LTCG

The LTCG was re-introduced in the February 2018 Union Budget to shore up tax collection and curb the misuse stock exchange platform for evasion of taxes. Accordingly, gains made on selling of equities after a period of more than one year are taxed at 10 per cent. Market experts say allowing grandfathering benefit on gains made before 2018 was a friendly move. However, lack of indexation benefit is incentivising investors towards short-term trading. While the tax on LTCG is 10 per cent, that on short-term gains is only 15 per cent. Market players say given the low tax differential, investors are no longer inclined to take long-term investment decisions. Some say the holding period for computing LTCG should be increased to three years so that investors are prompted to make sticky investments.

Tax on dividend income over Rs 10 lakh

In the Union Budget 2016, the government introduced additional DDT on investors who receive dividends in excess of Rs 10 lakh. Investors now have to pay a tax of 10 per cent on dividends received in excess of Rs 10 lakh in a financial year. Many have been against this tax as it results in multiple tax incidence. The dividend is paid to investors by a company is after paying tax and also, the company has to pay taxes on dividends distributed. Experts say double taxation of dividends leads to adverse effects on the capital structure of companies. An adversarial dividend taxation policy leads companies to favour debt capital over equity capital as the tax advantage lies with debt as against equity. This leads companies to deploy excessively high financial leverage. Also, as DDT pinches promoters more than small shareholders, most companies have started opting for share buybacks in lieu of dividends. Most promoters are able to take advantage of the buyback by tendering their shares, however, small shareholders are getting deprived of dividends, say experts.