Ahead of every Union Budget, there are expectations of some sort of relief for the common man in terms of tax reliefs and welfare measures. Investors too typically look for positive cues for an enabling environment. Logically, this time too, the case wasn’t different.
Only that, when the Budget speech finally got over, this budget tuned out to be one of the worst for the honest middle-class taxpayers and investors. It resonated well with the caution in the Economic policy released a day before the budget on exuberance in the stock markets and speculative investment activities. Typically, the government’s Budget makers don’t pay attention to the surveys, but this time I guess they did.
If one keeps the technicalities aside, every tax liablity for domestic investors have gone up on both financial and non-financial assets. Most of the taxes both short-term and long term have gone up. In her Budget 2024 announcement, Finance Minister Nirmala Sitharaman stated that the long-term capital gains tax (LTCG) on all financial assets—including equity—will increase to 12.5% from the current rate of 10%. The tax on short-term capital gains (STCG) was increased from 15% to 20%.
However, the biggest blow came in the form of removing indexation while calculating the Long term capital gains (LTCG). This will essentially means that while selling properties that are held for long term, the investor will not get the benefit of adjusting inflation impact in the final sell price. This would mean that the final tax liability will go up by few lakh rupees on property sale.
Clearly, the increase in STCG and LTCG on equities will make equities a less attractive asset class for investors. In short, the Budget has taken away the incentives for investments in all types of asset classes including equity, gold and real estate. In an economy where participation of investors in equity markets is miniscule of what is there is other comparable markets, this Budget blow is surprising. It will act as a turn off for all category of investors.
At the press conference that followed the Budget, the FM appeared clueless on the rationale of tax increases when responded to a question from one of the reporters. Sitharaman said the rationale for tax changes is to bring in simplicity in the tax regime. This is an outright lie or ignorance. If simplified tax regime was the idea, the government should have retained LTCG at current levels across assets and give indexation benefit uniformly to all asset classes. Both the RBI and the government have failed to tame inflation. At least give people a way to beat inflation in investments through indexation? But things have been made worse by the latest changes for average taxpayers.
What these changes effectively going to do is encourage black money transactions in real estate as investors will underreport the real estate asset sale prices and attempt to evade tax. This will complicate the job of taxman and eventually will create a bigger parallel economy. What is even more surprising is the fact that this was a year when the government received Rs 2 lakh crores RBI dividend bonanza. The government has stuck to the path of fiscal consolidation by keeping the fiscal deficit lower at 4.9% while capex spending at same level Rs 11.1 lakh crores.
Given the extra headroom, the government could have retained the capital gains tax rate and indexation benefits, but clearly it chose otherwise. As things stand today, bank deposits doesn’t make sense for savers due to high inflation. Real estate cannot be as profitable as it was before due to lack of indexation benefit and equities have become less attractive due to high LTCG and STCG. Thus, to cut a long story short, investors have been caught in a bad trap by the Budget 2024. Undoubtedly, this is one of the worst budgets for the investors and savers in many years.