Budget 2018: With long-term capital gains tax, free market ride is over

The main focus of Finance Minister Arun Jaitley, while presenting the Budget 2018, has been on the rural sector and infrastructure development. This was expected from the government in its last full Budget ahead of the general elections scheduled in 2019. 

The assumptions on tax revenues going ahead are reasonable and not aggressive given that the taxpayer base will increase. That said, the fiscal deficit at 3.3 per cent of the GDP (gross domestic product) for 2018–19 is still a challenge. The economy needs to be firing on all cylinders to achieve the set fiscal deficit target. The bond yields are now nearing 7.5 per cent. This clearly indicates that there will be challenges in meeting the fiscal deficit target. 

In regard to the equity markets, the free ride is over with the long-term capital gains tax (LTCG) being reintroduced. LTCG will impact sentiment going ahead, but not much. The mid-and-small-cap segments will be impacted heavily as these two were the main segments where investors made the most money. 

Over the past few years, both these segments have outperformed the frontline indices and one can expect some profit booking now. Going ahead, one may not see as much buoyancy in the mid-and-small-caps.

The LTCG proposal also does not leave much room in holding a stock for the short term, where the tax is 15 per cent, and the long term where the tax is 10 per cent. 

Reducing corporate tax rate is a step in the right direction and will benefit small-and-medium-sized businesses (SMEs). Overall, focus on farmers, healthcare and SMEs in Budget 2018 is a welcome and a positive step. 

Given the tone of the budget, markets may speculate that the government may reschedule the general elections, though the benefits announced may not start to show up for the economy that quickly for the government to be able to do this.

Andrew Holland is chief executive officer, Avendus Capital Alternate Strategies

Disclaimer: The views expressed are his own

(As told to Puneet Wadhwa)