Nirmala Sitharaman will be walking a tightrope while presenting Union Budget 2020 on February 1. A difficult task of balancing fiscal deficit lies ahead of her.
Indian economy is witnessing a severe economic slowdown and requires concrete actions that include steps such as tax cuts in order to boost demand.
Markets are anxiously waiting for the FM to exempt or at least lower Long Term Capital Gains (LTCG) tax and Dividend Distribution Tax (DDT) to attract capital inflows.
Investors pay LTCG tax of 10%
At present, investors have to pay LTCG tax of 10 per cent on the sale of shares held for over a period of one year. This is in addition to Securities Transaction Tax (STT) that is levied on transactions on purchase/sale of securities on stock exchanges.
On the other hand, companies have to pay DDT of 20 per cent on dividend announced and individuals have to pay additional 10 per cent income tax if the income generated through dividend exceeds Rs 10 lakh per annum.
"There are also expectations that the government might do away with the Dividend Distribution Tax DDT on equity given that the Government wants to attract investments," said Angel Broking report.
However, if the FM fails to lower these taxes, the market is expected to react negatively and a sharp intraday correction may ensue.
"If the FY20 fiscal deficit is curtailed within 37 per cent and if LTCG is eliminated, markets are likely to remain steady. If these conditions are not met, brace for a fall," said VK Sharma, PCG Research Head, HDFC Securities.
Sanjay Mookim, India Equity Strategist at BofAML expects the Budget to contain some pro-market/economy measures.
"Tax cuts (lower income categories, long-term capital gains), real estate incentives and credit support for small businesses are potential candidates," he said.
The benchmark 50-share Index Nifty ended 0.61 per cent lower today. It has fallen 1.80 per cent in the month of January 2020.