Indian Indices Bleed; Sensex Ends 840 Points Lower

Fri, 2 Feb Closing

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After opening their day in red, share markets in India continued their downtrend and ended today's trading session deep in the red. Losses were seen across all sectors with stocks in the realty sector and stocks in the power sector leading the losses.

At the closing bell, the BSE Sensex stood lower by 840 points (down 2.3%) and the NSE Nifty closed down by 256 points (down 2.3%). The BSE Mid Cap index ended the day down 4%, while the BSE Small Cap index ended the day down by 4.7%.

Asian stock markets too, finished in red. As of the most recent closing prices, the Hang Seng was down by 0.12% and the Nikkei 225 was down by 0.90%. Meanwhile, European markets were also trading in the red. The FTSE was down by 0.34%. The DAX stood was down by 1.57%, while the CAC 40 was down by 1.36%.

The rupee was trading at Rs 64.00 against the US$ in the afternoon session.

In the Union Budget 2018 announced yesterday, Finance Minister Jaitley announced a long-term capital gains tax of 10% on sales of listed securities on gains over Rs 1 lakh. This came in as a surprise for the market. The market at the worse was expecting a change in the definition of long term capital gains.

Currently, sale of listed securities beyond a period of one year are exempt from taxation. The market was expecting this period of one year to be extended to two or three years.

However, as per the current proposal if you sell your equity within the period of one year, you would have to pay the usual 15% short term capital gain on your gains. For period beyond one year, you will have to pay a long-term capital gain of 10% without the benefit of indexation.

Nevertheless, the tax imposed is still lower than the short-term capital gains tax and a third of what you would pay if your earnings are in the highest tax bracket from any or all other sources.

Also, with the "grandfathering" that the government has allowed, the new levy should hurt less than previously thought. Put simply, this means there is no retrospective taxation.

For example, if an equity share is purchased six months before January 31, 2018 at Rs 100 and the highest price quoted on January 31, 2018 for this share is Rs 120, there will be no tax on the gain of Rs 20 if this share is sold after one year from the date of purchase.

However, any gain in excess of Rs 20 earned after 31st January, 2018 will be taxed at 10% if this share is sold after 31st July, 2018.

The tax slab remains unchanged. However, Mr Jaitley provided certain deductions which could marginally benefit the salaried individual.

The budget provided a standard deduction of Rs 40,000 for salaried individuals. Standard deduction essentially means that the employee does not require to furnish any investment proofs or bills to claim this deduction of Rs 40,000. However, there is a catch.

Speaking of taxation, one should note that there has been a large increase in registered indirect and direct taxpayers lately, as can be seen from the chart below:

A Large Increase in Registered Indirect and Direct Taxpayers

Since the launch of Goods and Services Tax (GST), there were 9.8 million unique GST registrants, an increase of 50% compared to the previous tax regime. There has also been a large increase in voluntary registrations, especially by small enterprises that buy from large enterprises wanting to avail themselves of input tax credits.

Similarly, after November 2016, 10.1 million tax filers were added compared to an average of 6.2 million in the preceding six years. Further analysis suggests that new filers reported an average income, in many cases, close to the income tax threshold of Rs. 2.5 lakh, limiting the early revenue impact. As income growth pushes many of the new tax filers in time over the threshold, the revenue dividends should increase robustly.

These changes can have profound effects on the Indian economy. With the increasing tax base, the government will have a significant amount of resources to spend on infrastructure, health and education, While the fiscal deficit will be stable.

As organized players gain market share, it will begin to reflect in corporate earnings and stock prices too.

In the news from commodity markets, crude oil witnessed buying interest today. Most of the gains were seen as a survey showed strong compliance with output cuts by OPEC and others including Russia. This also allayed concerns about surging US production and aided crude oil prices.

Note that crude oil prices have been on a rising trend this year. However, this is not good news from India's perspective.

As we wrote in a recent edition of The 5 Minute WrapUp...

• Fiscal revenues are at risk. Particularly if the government is forced to consider a cut in fuel excise duties due to a rally in oil prices. In recent times, a sharp jump in excise collections has helped indirect tax collections. Any risk to revenues and subsequent threat to the fiscal deficit target at 3.2% of GDP would require tighter spending cuts.
  
  Secondly, the impact on inflation needs to be monitored. This narrowing the central bank's scope for further rate cuts.
  
  Lastly, low crude prices were a positive growth impetus through higher discretionary incomes for households and lower input costs for manufacturers and farmers. Part of this benefit is likely to be eroded as retail fuel costs rise. As for corporations, expansion in gross margins caused by falling commodity prices is also likely to wane, pressurising profitability.

You can read the entire article here.

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