BUDGET 1999-2000
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BUDGET 98-99
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Budget will help corporate India to recast and reorganise itself

Uday Kotak

It is a responsible Budget. I think the finance minister has given some and taken some. The markets will love the reduction in capital gains tax. Along with that he has continued the indexation benefit that was earlier available. I thought that he would remove the indexation benefit, which was available on long-term capital gains, when he reduced the taxation limit from 20 per cent to 10 per cent.

The second positive step for the stockmarket is the enormous thrust to the mutual fund industry. The impact of this is going to be phenomenal. The scheme which gives tax exemptions to dividends from mutual funds that have invested more than 50 per cent in equities, is going to give a tremendous impetus to the mutual fund sector.

The markets are not going to like the increase in direct taxation, which in a way is a step backwards.

By clarifying the ambiguities with regard to mergers and acquisitions and buyback of shares, the finance minister has helped corporate India to restructure and reorganise itself. One restriction was Section 72 A, that has been cleared.

The old rule was that if unless a profit-making company merged with a loss-making company, it was not available. My comprehension is that now, if a loss-making company is merging with a profit-making company, the tax benefit of the loss-making company will be available to the new company.

If that is true, it will spur significant merger and acquisition activity of loss-making companies merging into profit-making ones. And this is a significant issue that so far was being confused under Section 72 A. One still has to look at the fineprint, but is definitely a step in the right direction.

On demergers, there was an anomaly where certain benefits available for mergers were not available for de-mergers. The finance minister clarified that and has said it is available for mergers as well as de-mergers. This again is a positive step.

On buyback of shares, the unanswered question is: Is the individual who sells the shares back to the company liable for capital gains tax? Another question is: When the company buys back these shares, does it amount to distribution of dividend and therefore should it be taxed twice? Sinha clarified this by stating that there is no dividend tax on the sale. The seller pays only a capital gains tax.

I would say the Budget is positive for the capital markets. At the end of the day, investment is linked to the mindset. Therefore, if we can revive a feel-good factor in the Indian stockmarket, that itself will be a critical factor in bringing back investment in the country.

Uday Kotak is vice-chairman, Kotak Mahindra Finance Limited.

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