The latest budget has been announced and it can be expected that the stock market will see a positive trend in its first session. When the gong will ring and the market will open, there is an expectation that there will be calls of “Lao Maal” or a bullish trend can be expected. The buoyed sentiment is based on the fact that the market will see added activity in the coming months. In the latest budget, the Finance Minister has suggested that income or fixed return mutual funds will see their tax rate increased to 25% while stocks related funds would still be taxed at 15%.
The purpose of this additional taxation on income generating funds is to encourage them to invest more in the stock market which will reduce their tax bill and see more funds being transferred from income generating assets to stocks. The influx of these funds coming from the mutual funds can be expected to start a new bullish trend in the market.
Considering the market is already trading at an all time high of 122,611, this can be a start of a new rally which can see the index cross the 125,000 mark and close out the current Financial Year nearly 60% above where it was trading at the end of June last year. Seeing that the index was less than 45,000 two years ago, the index will almost triple from where it was just a couple of years ago.
Before the budget was announced, there was an expectation that capital gains tax was going to be increased from 15% and the withholding tax on dividend will also see a similar increase which would have dampened the rally to some extent. Both these tax increases failed to materialize as no such increase has been announced.
In addition to that, there is a suggestion to tax interest income at 20% which was 15% last year. The additional tax will see a decreased return for individuals saving and with the fall in interest rates to 11% in recent months, there can be an additional move to go towards stocks and mutual funds for better returns.
One loophole that has been tightened in the budget which can see a decreased activity in the market is the fact that non-filers are not allowed to buy shares or invest in mutual funds. This is not applicable on current investors as there are stringent measures in place to validate their source of income and complete the Know-Your-Client (KYC) due diligence process. This tightening can see prospective investors from entering the market as they will have to become filers before investing.
In terms of the mutual funds listed, there are pure funds like income funds or stock funds which will see little change in terms of their returns earned. The benefit will primarily go to balanced funds which invest in both income generating assets and stocks. There will be a greater motive for these funds to move towards stocks and decrease their tax liability which will lead to better returns being registered by them.
In terms of the companies themselves, the budget will look to decrease the super tax that was levied on these companies which were earning revenues between Rs 200 million and Rs 500 million. For companies earning revenues between these bands, the super tax has been decreased by 0.5% which will see their earnings grow. In terms of expectations, it was hoped that the super tax would be reduced greatly with some hoping that it would be abolished totally. That has not come to fruition. In the previous tax policy, companies earning revenues between Rs 150 million and Rs 200 million were taxed at 1%. That has not been changed.
The next three bands starting from Rs 200 million to Rs 250 million, Rs 250 million to Rs 300 million and Rs 300 million and above were previously taxed at 2%, 3% and 4%. All these rates have been revised downwards to 1.5%, 2.5% and 3.5% respectively.
One of the biggest fears that has thankfully failed to be realized is the imposition of 18% general sales tax on fertilizer, pesticides and farm equipment. There was pressure from the International Monetary Fund (IMF) to bring these agricultural inputs under the same tax regime as other consumer products. After negotiations with the fund, the government has been able to suspend the implementation of these tax rules which can see the fertilizer, tractor and chemical sector reap benefits in the market tomorrow.
In terms of negative impact, the auto sector can be expected to take some hit as all automobiles have been rationalized to pay 18% general sales tax regardless of smaller engine size which saw lower rate of taxation previously. The latest budget has brought all cars under the same tax regime which will make them more expensive impacting the bottom line of local auto assemblers. There is an additional levy that is being considered on fuel burning vehicles under the Energy Vehicle Policy where additional tax will be imposed on import and sale of internal combustion engines which utilize fossil fuels. This levy will be based on the engine capacity and will be implemented to reduce the environmental impact and use of fuel leading to a decrease in the import bill.
Similarly, Oil Marketing Companies (OMCs) can see their bottom line impacted after the imposition of carbon levy which can have an impact on their sales as the levy of Rs 2.5 per liter can be expected to affect demand.
