In a way, the Economic Survey set the stage for some of the changes in the budget. The publication noted what Sebi, RBI and others have been saying about speculative activity in some segments of the financial markets. Sebi has made it clear that it wants to tamp down on some of this speculative mania in the markets. The finance minister made changes in the securities transaction tax (STT) levied on futures and options in that direction.
The STT charged on options has been increased from 0.0625% to 0.1% of the option premium. The STT charged on futures has been increased from 0.0125% to 0.02% on the price of futures. This makes trading futures and options costlier now. Although these instruments were originally meant to let institutional investors hedge investments, because of the gains they potentially allow, many retail investors had been using futures and options to speculate on the markets. This speculation will soon become much more expensive.
The tweaks to the capital gains tax were largely expected. The short-term capital gains tax has been increased from 15% to 20%. Long-term capital gains tax has been increased from 10% to 12.5%. While this may be a marginal increase, it may be perceived as a negative by the larger investors. The bottom line is, speculation becomes costlier and long-term investments become slightly less attractive.
At the same time, this budget had a lot of proposed measures to unleash India’s entrepreneurial energies.Finance minister Nirmala Sitharaman, in her record seventh budget, announced support for small businesses, giving them better access to capital and raw materials, and easing their logistical challenges. It also tries to improve the quality of our workforce, with its heavy focus on education and skilling. This is much needed because MSMEs are key to solving India’s unemployment challenges.Most importantly, the budget makes investing in start-ups much more attractive. Earlier, private investments in startups attracted capital gains of 20%. This has now come down to 12.5%, in line with investing in listed securities. The budget also finally removes the dreaded ‘angel tax’ on investments into start-ups. The tax was introduced as a way to stop people from setting up shell businesses to launder money. Unfortunately, it ended up hurting startups, because to tax authorities, the high valuations of startups made them hard to distinguish from shell companies. So, startups would have to pay a large part of the capital they raised as income tax. It’s already risky to run a startup; this tax made it more unattractive. But now, the tax has been removed for good.All in all, this budget boosts Indian entrepreneurship, but tries to reduce speculation in financial markets.
This is a hard balance to strike, and the changes in the budget may be just the beginning. All said and done, a thriving capital market is equally crucial to the growth of our economy and the startup ecosystem. This is something policymakers must keep in mind.
(The author is CEO, Zerodha)
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