Budget 2024: Implications for the Financial Services and Capital Markets Sector

Impact of Long-Term Capital Gains (LTCG) Tax Increase

As part of the tax reforms in the budget, a notable adjustment is the increase in the tax rate on short-term capital gains (STCG) to 20% from the previous 15%, applicable to all financial assets. Moreover, the tax on long-term capital gains (LTCG) has been increased from 10% to 12.5%, although the gains ₹1.25 lakh per year remains exempt.

The aim of this change is to increase revenues and better align the Indian tax system with global standards.

While this change may initially raise concerns among investors, its overall impact is expected to be mitigated by the stability and continued growth of capital markets. Markets have shown considerable resilience to regulatory changes and the increase in LTCG tax is expected to be absorbed without causing major disruptions.

The more immediate question will be whether this budget will accelerate the recovery of profit growth for Indian companies. While the tax changes may spark short-term excitement, the real measure of success will be their ability to support long-term economic growth and stability.

Increased STT on Futures and Options (F&O)

To curb excessive speculation in the futures and options (F&O) market, the Budget has proposed to raise the securities transaction tax (STT) to 0.02% for futures and 0.1% for options. The measure aims to curb risky trading behaviour that has been a concern for regulators, including the SEBI chairman.

By imposing higher STT, the government intends to curb speculative transactions and bring necessary control over the dynamics of the F&O market. However, this increase may also affect market turnover and revenues of the exchanges.

Strengthening the inflow of foreign direct investment (FDI)

In order to boost foreign direct investment (FDI), the budget has proposed simplifying the rules and regulations governing FDI and foreign investment. The move is expected to facilitate greater inflows and promote the use of the Indian rupee in international transactions.

By prioritising and relaxing regulations, the Budget aims to create a more attractive investment climate, encouraging global investors to invest in Indian markets.

Share buyback tax

Historically, taxation of share repurchases has been managed at the company level, with no additional tax liability for investors. The new budget reform changes this by shifting the tax burden to investors, treating the income from the repurchase as dividend income, which will now be taxed according to the investor’s income tax bracket.

Buybacks and tax-free dividends have always had a loophole, and the equalization was expected. While this reform is expected to boost corporate cash flows and revive share buyback programs, it may also discourage investors due to higher tax implications.

The new tax structure could impact cash-rich business owners who rely on stock buybacks as a method of returning capital to shareholders.

Ending the Angel Tax and Other Tax Reforms

A significant boost for the startup ecosystem comes with the elimination of the angel tax for all investor classes. The move is expected to create a more supportive environment for startups, fostering innovation and potentially boosting market sentiment.

In addition, the budget introduces several tax reforms aimed at improving the ease of doing business. These include rationalising tax brackets and reducing corporate tax rates for small and medium-sized enterprises (SMEs).

These reforms are expected to increase the flow of credit and open up new investment opportunities in the financial services sector, resulting in a more conducive environment for business growth.

Application

This Budget strengthens India’s financial market and addresses key issues such as capital gains taxation, financial and non-financial transaction tax (STT) and digital payments, which provide the foundation for a resilient and dynamic economic environment.

As the financial services sector adapts to these changes, their overall impact on capital markets and economic growth will become more visible, shaping India’s financial landscape in the years to come.

Combining increased capital spending, strategic tax reforms and support for key sectors, the Budget aims to provide diverse opportunities for growth and innovation in the financial services sector.

The Union Budget 2024 presents a reassuring picture of India’s growth story with a comprehensive framework to stimulate economic growth and improve the financial ecosystem.