The Hindu : National : Turnover tax dampens stock market

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Friday, Jul 09, 2004

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National

Turnover tax dampens stock market

By Oommen A. Ninan

MUMBAI, JULY 8. The bears ruled the roost on the bourses today as the Finance Minister, P. Chidambaram, announced the Union Budget in Parliament. The market lost 112.13 points compared to its previous day's close of 4955.97.

The Bombay Stock Exchange (BSE) 30-Share Sensitive Index (Sensex) opened at 4972.06, touched a high of 5004.17 around noon and declined to a new low of 4808.63 to close at 4843.84. After rising on the hope of increased investment proposals in several sectors, including telecom, shipping, power and insurance, the Sensex shed its gains after the Finance Minister announced the replacement of long-term capital gains tax with 0.15 per cent turnover tax on all transactions of securities on stock exchanges.

The market demonstrated a cautious optimism at the beginning of the Budget presentation, but as the Minister announced a turnover tax of 0.15 per cent, the mood dipped. The gains of 112.20 points in the last two days, were wiped out. The turnover tax on securities transactions has been introduced while long-term capital gain tax has been removed, apparently with a view to curb runaway speculation on stock exchanges. "This should not be a matter of concern, keeping in mind the overall interest of the corporate sector and its growth", said Dinesh Vyas, taxation expert and senior advocate, Supreme Court.

"As far as the overall national interest is concerned, I think turnover tax is a good feature. A particular community of brokers may suffer, but the real advantage of the turnover tax is that it will eliminate the unnecessary speculative mood that was ruling the markets in the last few months. Speculation is evil, and keeps normal investors away from the stock market. So the turnover tax is definitely going to eliminate speculation and improve the climate of long-term investment," Mr. Vyas added.

Jaideep Goswami, Research Head, HDFC Securities, said:

"In the short term, the turnover tax will have a negative effect. But on the other hand, the tax on short-term capital gains has been reduced from 33 to 10 per cent, which is good.

"The Finance Minister has made many investment decisions on the agriculture sector. So companies connected to agriculture and irrigation will benefit — such as tractor manufacturers and water-processing and pipeline companies. The broad investment approach is positive over the long term. The turnover tax is going to impact the intra-day market volume. Basically the market has given greater weightage to factors that will negatively impact market volume and given less importance to the long-term factors, which are beneficial to the economy. In the short term, the market will remain weak and a stock-specific upward move will be seen."

Another school of thought strongly believes that the abolition of long-term capital gains tax and the lowering of short-term capital gains to 10 per cent will encourage savers to migrate to the capital markets. "The abolition of long-term capital gains tax is positive from a long-term investor's perspective. It will enhance the flow of risk or equity capital to the industry and ensure healthy capital markets", said Sunil Mehta, Country Head and Chief Executive, AIG (India), adding, "Though the introduction of turnover tax may have a negative effect on the equity markets in the short run, the overall tax structure for securities transactions will not only help genuine investors but also help plug leakages in the taxation system."

Observers in the mutual fund industry welcome the decision to plug the loopholes with regard to dividend stripping and bonus units. However, they are anxious about the applicability of turnover tax, as the corresponding benefit in terms of the capital gain amendment has not been extended to mutual-fund investors. "The debt market is concerned that the new tax might prove to be a burden on the debt instruments, considering their narrow trading margins," said Rajnish Narula, CEO, Allianz Capital Asset Management Company. "The increase in dividend distribution tax for corporates seems to reduce the attractiveness of the dividend options of fixed-income schemes." This is only relative, he insisted, as they remain a good option in an absolute sense, especially from a short-term investment perspective. "We expect the dividend schemes of equity schemes to gain favour going forward," said Mr. Narula.

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