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Budget 2018: These are the taxes it could hike and how you will be hit

Along with hopes there are fears of unpleasant surprises the Budget could spring. ET Wealth lists the possibilities and how they can impact you.

, ET Bureau|
Jan 29, 2018, 02.56 PM IST
Since the time frame to compute capital gains for other products is three years, the government may use the same yard stick for equities as well.
With more and more economic policies moving beyond the Budget, the significance of the annual fiscal exercise may have diminished to some extent. The introduction of the Goods and Services Tax (GST) has reduced its importance further.

This is because several indirect taxes like excise duty and VAT are already merged with the GST and therefore, are outside the Budget’s ambit.

However, the government can always tinker with direct taxes and import duties, and that’s where the fear lies. An unstable GST structure is another worry. “GST collections have been dipping steadily for the last couple of months and the government may take additional measures to shore up revenaue,” warns Akhil Chandna, Director, Grant Thornton India.

1. Long term capital gain tax on equities
The government can cite several reasons to tax long term capital gains (LTCG) from equities. First is the taxation anomaly between listed and unlisted shares. LTCG from listed equities is tax-free, but from unlisted equities are taxable. Similarly, gains from stocks made by brokers or traders are treated as business income and taxed at marginal rates. Since the time frame to compute capital gains for other products is three years, the government may use the same yard stick for equities as well.

What it means for you
If introduced, your tax liability will go up. Next, it will spoil stock market sentiments because it will hurt foreign portfolio investors. “Since capital gains are tax-free in several countries, FPIs may not invest in India,” says Shenoy. The government could cushion the blow by proposing a smaller tax rate. “If it happens, the taxation rate may be capped at 5%,” says Melvin Joseph, Founder, Finvin Financial Planners

2. Increase in securities transaction tax (STT)
Since introduction of tax on LTCG may scare away foreign investors, the government may increase tax collection by way of increasing STT. STT was introduced in lieu of removing capital gains tax and therefore, it is possible the government may increase it instead of reintroducing capital gains tax. Another advantage with STT is its collection efficiency. The BSE and NSE deducts and gives it to the government, saving it the hassle of chasing investors.

What it means for you
Current STT rates (0.1% for delivery based transactions and less for others) is low. Increase in STT will impact short-term traders, but the impact on long-term investors will be minimal. However, increase in LTCG time frame will impact institutional investors and therefore, dent the stock market sentiments. “Since most FPIs are short-term players, the impact on them will be more,” says Joseph.

3. Return of inheritance tax
To increase tax revenue, the government may reintroduce the inheritance tax, that was earlier known as estate duty. “Since the BJP is already in favour of inheritance tax, the probability of it happening is high,” says Shenoy

What it means for you
Reintroduction of estate duty may not impact small taxpayers much because the government is going to keep the threshold level high—only on wealth transfer above Rs 5 crore or so.

4. Hike in customs duties
After the merger of several indirect taxes into GST, customs duty remains a big segment the government has full control over. Therefore, most of the tax increases to meet the revenue shortfall will be done through it. Giving impetus to domestic manufacturing— through Make in India—will be another goal met by increasing customs duty. The government has already started working in this direction with introduction of additional duties on items like cell phones, solar panels, etc.

What it means for you
Here again, the impact on you will be indirect. For example, mobile vendors increased prices after the government increased customs duty on smartphones. Similarly, the import duty hikes on solar panels have created problems for some of the solar power generators and therefore, the solar power rates may also go up.

5. Missing fiscal targets
Though direct tax collection was smooth in 2017-18 and has shown an increasing trend, indirect tax collection was weak due to the disturbances created by the introduction of GST. More importantly, the GST is yet to stabilise and therefore, the uncertainty over indirect tax collections will continue in 2018-19 as well. This would mean the government not meeting fiscal targets. “The government may revise the deficit target to 3.4% of GDP for 2017-18 (higher than the budgeted estimate of 3.2%) and to 3.2% of GDP for 2018-19 (higher than the target of 3% set last year). It means that the plan to meet the 3% deficit target will be postponed by one more year to 2019-20,” says Gautam Duggad, Head of Research, Motilal Oswal

What it means for you
The impact on you will be indirect. This is because the markets will be keenly watching the fiscal deficit projections and whether the long-term fiscal consolidation path is adhered to. The impact can come through the currency market—the rupee may weaken and push up inflation. It can also be through the debt market— government borrowings will go up. “Gross market borrowings could rise from the revised estimate of Rs 6.3 lakh crore in 2017-18 to Rs 7 lakh crore in 2018-19,” says Duggad. This additional borrowing will push up yields; so long dated bonds or long duration funds will give negative returns. Higher fiscal deficit will not allow RBI to reduce rates further, so the loan rates will also not come down. There will be negative impact on stock market investors as it will react negatively to this slippage.

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