The Union Budget 2024 marks a pivotal moment in India’s economic journey, introducing a sweeping array of initiatives aimed at invigorating growth and transforming the financial landscape. These measures are poised to impact the financial services sector and capital markets, driven by increase in capital expenditure, significant tax reforms, and enhanced support for crucial sectors.
Impact of increase in long-Term capital gains (LTCG) tax
As part of the budget’s tax overhaul, a notable adjustment is the increase in the short-term capital gains (STCG) tax rate to 20% from the previous 15%, applicable to all financial assets. Additionally, the long-term capital gains (LTCG) tax has been raised to 12.5% from 10%, although profits up to ₹1.25 lakh per year remain exempt.
This adjustment aims to bolster revenue and align India’s tax regime more closely with global standards.
While this change may initially raise concerns among investors, its overall impact is anticipated to be moderated by the stability and continued growth of the capital markets. The markets have shown considerable resilience in the face of regulatory changes, and it is expected that the increase in LTCG tax will be absorbed without causing any major disruptions.
The more pressing issue will be whether this budget will catalyse restored earnings growth for Indian companies. While tax changes can generate short-term excitement, the true measure of success will be their capacity to foster long-term growth and economic stability.
Increased STT on Futures and Options (F&O)
In a bid to mitigate excessive speculation in the futures and options (F&O) market, the budget proposed raising the security transaction tax (STT) to 0.02% for futures and 0.01% for options. This measure is intended to temper the risky trading behaviour that has been a concern for regulators, including the Sebi chairperson.
By imposing a higher STT, the government aims to curb speculative trading and bring a necessary check to the F&O market dynamics. However, this increase could also impact market turnover and revenue for exchanges.
Boost to foreign direct investment (FDI) inflows
To stimulate foreign direct investment (FDI), the budget has proposed simplifying the rules and regulations governing FDI and overseas investments. This move is expected to facilitate higher inflows and promote the use of the Indian Rupee in international transactions.
By prioritizing and easing regulations, the budget aims to create a more attractive investment climate, encouraging global investors to channel their funds into Indian markets.
Tax on share buybacks
Historically, taxation on share buybacks was managed at a company level, with investors not facing additional tax liabilities. The new budget reform changes this by shifting the tax burden to investors, treating buyback income as dividend income, which will now be taxed according to the investor’s income tax slab.
Buyback and tax-free dividend always had a gap, and the equalisation was expected. While this reform is expected to enhance corporate cash flow and invigorate share repurchase programs, it could also discourage investors due to the higher tax implications.
The new tax structure might affect promoters of cash-rich firms who relied on buybacks as a method to return capital to shareholders.
Termination of angel tax and other tax reforms
A significant boost to the startup ecosystem comes with the abolition of the angel tax for all classes of investors. This move is anticipated to create a more supportive environment for startups, fostering innovation and potentially revitalizing market sentiment.
In addition to this, the budget introduces several tax reforms aimed at improving the ease of doing business. These include the rationalization of tax slabs and a reduction in corporate tax rates for small and medium enterprises (SMEs).
Such reforms are expected to enhance credit flow and unlock new investment opportunities within the financial services sector, providing a more conducive environment for business growth.
Conclusion
By reinforcing India’s financial markets and addressing critical areas such as capital gains taxation, STT on F&O, and digital payments, the budget sets the stage for a resilient and dynamic economic environment.
As the financial services sector adapts to these changes, the overall impact on capital markets and economic growth will become clearer, shaping India’s financial landscape in the years to come.
With combination of increased capital expenditure, strategic tax reforms, and support for key sectors, the budget aims to provide diverse opportunities for the financial services sector to expand and innovate.
Union Budget 2024 presents a reassuring view of India’s growth story through this comprehensive framework designed to stimulate economic growth and enhance the financial ecosystem.
