Model Answer

The Union Budget 2018-19 introduced notable changes to the taxation of capital gains and dividends, significantly impacting investors and the stock market.

Reintroduction of LTCG Tax

• The government reinstated a 10% Long-term Capital Gains (LTCG) tax on profits exceeding ₹1 lakh from the sale of listed equity shares. This move aimed to broaden the tax base and ensure fairness, as the previous tax exemption created disparities between equities and other asset classes.

Introduction of DDT on Mutual Funds

• The budget also introduced a 10% tax on dividends distributed by equity-oriented mutual funds. This aimed to close loopholes that allowed tax-free income distribution and prevent tax evasion, particularly in dividend stripping practices.

Advantages of These Changes

• • Broadened Tax Base: The government’s revenue potential increased by taxing equity gains and dividends, facilitating investments in infrastructure and development.
  • Market Stability: LTCG encouraged long-term investments, reducing speculative trading and promoting market stability.
  • Prevention of Tax Evasion: The DDT closed a loophole in mutual fund dividends, ensuring all dividend income is taxed, contributing to better compliance.
  • Global Alignment: These reforms harmonized India’s tax regime with international standards, attracting foreign investments.
    Source: Post-Budget Market Analyses 2018.

Disadvantages of These Changes

• • Investor Sentiment: The stock market initially reacted negatively to these tax changes, with middle-class investors feeling the impact of reduced post-tax returns.
  • Complex Compliance: Investors faced increased complexity in tax filings, leading to greater reliance on financial advisors.
  • Impact on Dividend Policies: Companies began retaining profits rather than distributing them, impacting shareholders’ income.
    Source: Financial Market Reports, 2018.

Conclusion

In conclusion, while the 2018-19 budget changes promoted equity and a broader tax base, they also led to market adjustments and increased compliance burdens. Policymakers must balance these effects to ensure sustainable financial growth.