Sensex soars 600 points as tax cut news lifts sentiment; could bring huge money into stock market

The Sensex closed 582 points higher at 39,831 while the Nifty hit the 11,800-mark for the 1st time since July 5.

The headline indices Sensex and Nifty soared to a 4-month high in the second session of Samvat 2076 as the buzz around equity tax rationalisation and other positive global factors lifted sentiments. The Sensex closed 582 points higher at 39,831 while the Nifty hit the 11,800-mark for the 1st time since July 5. The Prime Minister’s Office is reviewing the tax structure on equity, in order to simplify the regime and make investments in Indian markets more attractive, TV news channel CNBC Awaaz reported citing three sources. The Department of Economic Affairs and the revenue department have had meetings with the PMO, the report said.

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Shares of Tata Motors  posted their biggest ever 2-day gain after the firm recorded robust quarterly results. Tata Steel, Yes Bank, Axis Bank, Maruti Suzuki, Tech Mahindra and TCS were among the other top gainers in the Sensex pack, rising as much as 7.09 per cent. Shares of Bharti Airtel, Kotak Mahindra Bank, Powergrid, SBI were the only stocks in to end in the red among the Sensex stocks.

Taking stock of the robust gains in the session, Sandeep Nayak, ED & CEO of Centrum Broking said that the a comback in the auto sector sales this festive season, combined with the twin positive developments of the trade pact between the 10 ASEAN members and a proposed review of key taxes such as LTCG, STT and DTT before the budget have added further impetus to investor sentiment. Shares of auto-maker Tata Motors emerged as the biggest gainer surging about 17% after the company reported narrowing of losses in the September quarter.

The government is reportedly considering doing away with multiple taxes such as LTCG, DDT, STT, etc, and may move to a single-tax structure on equity investments, making compliance easier. The PMO is also said to be reviewing current rates of Long-term Capital Gains Tax and Securities Transaction Tax. The government is also considering abolishing Dividend Distribution Tax. Domestic companies pay this tax at the rate of 15 percent of the aggregate dividend declared, distributed or paid.

Umesh Mehta, Head of Research, Samco Securities said that a reduction in DDT will mean an abundant inflow from pension funds and any change in the current LTCG and STT rates will also aid to increase liquidity in the markets. “Old and middle aged investors who are somewhat risk averse will also turn towards the market for investments if the taxes are curbed. However, since the expectations are ripe on this front, an impact can already be factored in by D-Street even before Budget 2020. In any case, this will be a rational move by the regulators in order to boost the sentiment amidst the slowdown in the economy,” he told Financial Express Online.

Mustafa Nadeem, CEO of Epic Research said that currently, investors have to bear with the double whammy of DDT as well as LTCG tax. “Scrapping any of them is justifiable while keeping LTCG in play and relaxing the DDT. Since they gross up to almost 20% makes it much painful for investors. This would ease out much of the wrinkles and make India much compliant and yet attractive in global markets. We believe STT is still a long way to go since it lowered recently and scrapping this would not have that impact as compared to the any of the two mentioned above,” Mustafa Nadeem said in a note to Financial Express Online.

According to Saurabh Mukherjea of Marcellus Investment Managers, rationalising of the taxes for investors would be a sensible step, as investors are currently faced with many layers of taxes. “Firstly, one pays tax on income at source (whether that be income be salary or dividends). Secondly, at the point of investing, one pays taxes like STT. Thirdly, at the point of disinvesting one pays CGT (Capital Gains Tax). If over above this, one considers the wealth surcharge that the FM had imposed in the July 2019 budget, it is easy to see why rationalising the taxation regime for investors in Indian stocks is a sensible idea,” said Saurabh Mukherjea, Founder, Chief Investment Officer, Marcellus Investment Managers.