The stock market could experience a more severe decline than the one following the Lok Sabha election results if the upcoming Budget 2024 introduces unfavorable changes to the capital gains tax on equities. Chris Wood, global head of equity strategy at Jefferies, has issued a warning in his latest investor note, GREED & Fear, highlighting that any adjustments to long-term and short-term capital gains tax could trigger a significant market correction.
The Union Budget, scheduled to be announced on July 23, is expected to be closely scrutinized for potential impacts on the capital gains tax. Wood points out that if the budget introduces substantial increases in these taxes, the market could face a sharper downturn compared to the reaction observed after the June 4 election results, when the BJP lost its majority but managed to form a coalition government.
Wood, however, notes that there appears to be less concern about an increase in capital gains tax compared to previous times. He suggests that the re-elected government might avoid such a move due to its reduced mandate. Yet, if this assumption proves incorrect and the capital gains tax is significantly raised, the resulting market correction could exceed the one seen after the election results.
Despite recent market fluctuations, including a notable correction on election result day, Wood maintains confidence in the Indian stock market’s resilience. He cites the strong recovery of the market, which rebounded 13.3% since June 4, as evidence of the robust participation of retail investors. According to Wood, the domestic stock market remains one of the most promising globally, driven by the growing involvement of retail investors.
Wood’s observations suggest that the Indian market has evolved to become more domestically driven. He describes this shift as part of the “cult of equity” emerging in India, indicating a promising future for the market despite past challenges.
Looking ahead, Wood advises investors to avoid selling off their holdings solely based on potential corrections, except for tactical reasons. He also shares insights on the anticipated budget, suggesting that while the government may address populist demands from minority parties in the coalition, the budgetary impact may not be as significant as feared.
Wood’s recent market commentary, shared during a CNBC-TV18 town hall, emphasizes the potential adverse effects of substantial increases in capital gains tax. He also highlights the benefits of having no capital gains tax, as seen in markets like Hong Kong, which could encourage investment and market growth.
As discussions continue, experts and industry bodies are advocating for a simplified and uniform capital gains tax regime to enhance transparency and ease compliance. Proposals include increasing the tax-free long-term capital gains (LTCG) ceiling from Rs 1 lakh to Rs 2 lakh and revising the tax structure to make India more competitive globally.
Sudhir Kapadia, Partner-Tax & Regulatory Services at EY, has emphasized the need for rationalizing capital gains tax rates and introducing uniformity across asset classes. He suggests that a 10% long-term capital gains tax rate for listed securities would improve India’s competitiveness on the global stage.
