Why does India need a new capital tax regime?

Markets this week 📊

After a pretty dull week for the markets and a disastrous performance by the Indian team in the semi-finals, a ravishing close on Friday was all that we needed. Thanks to better-than-expected US inflation data, markets closed in green for this week as well. 

We Tavaga Tribe are attending the Yourstory Media Tech Sparks event in Bangalore. Meeting some insipiational leaders, catalysing conversations and forging connections, its has been one crazy and exhilarating experience so far. If any of you are in Bangalore this weekend, we would love to catch up in person. 

Have you been busy as well and had no time to track your investments? We have started a new section “Money Matters” where we will take up one pressing personal finance issue that people face in their everyday lives and demystify it for our readers because after all, money matters! Do you have any investment concerns? Write to us at advice@tavaga.com and we shall answer it in our next wrap-up.

Now, let’s now dig deep into some of the important news that made headlines this week.

Uncomplicating gains 💸

What happened: As per news reports, govt is looking to overhaul the capital gains tax regime and make it simpler. Rationalisation of different holding periods is also on the cards 

Present: Capital gains are profits that investors make when they sell assets—equities, bonds, property, gold, etc that they’ve invested in. In the current regime, the long-term capital gains (LTCG) tax rate is 20%, except for gains from equities of more than ₹1 lakh in a year which is 10%. Short-term capital gains tax rate is 15% for equities and for rest depends on which income tax bracket the payer falls in. 

Long-term is defined differently for different assets: 

Equities: 1 year+ 

Real Estate: 2 yeas+

Debt: 3 years+ 

Our Take

India’s tax system is complex to say the least. From holding period to different tax regime to indexation clauses, there is too much complication to make sense of. Simplification will make life easy for the common man who is already burdened with so many investment options to choose from. Govt imposed a windfall tax on oil companies’ profits. Is something similar on the cards?

WORLD

“Trump”ty Dumpty had a great fall 📉

The “Red wave” that the Americans were all expecting finally happened—albeit not in DC but on Wall Street. US Stocks snapped their three-day winning streak as the fate of Congress remained unclear and the crypto bloodbath dampened the mood. The most likely outcome is a divided Congress with Republicans likely to gain control of the House while Democrats hold on to the Senate.

What’s the fuss? Midterm elections are generally a test for the incumbent president, Mr. Biden in this case, as they reflect people’s mood about the governing party after 2 years of rule. US Congress is made of two chambers, the House of Representatives and the Senate. Currently, both are controlled by the ruling party, the Democrats.

Will the curse come true? Historically, the sitting president’s party nearly always loses the midterm elections. Going by initial counting, even though the Republican Party has the wind in its sails Democrats have still done much better than what history had suggested. Even if Republicans do win the midterm eventually, it won’t be by a margin as large as during other midterm cycles.

Our Take

Midterm results are not firm indications of who will be the next occupant of the White House 2 years later but this outcome will dictate how the US will be governed till 2024. With Republicans likely to gain control of at least one of the houses, Biden government will struggle to push its key agendas like higher taxes for corporations, or any fiscal rescue packages in the event of a recession.

Ever since Biden took the oath in January 2021 in the middle of the pandemic, his term has been tainted by the scars of crisis, war, and ensuing inflation problems. His midterm performance will however give his 2024 prospects, a fresh breath of life. 

TECH

Never a boring day in Crypto world! 😲

What the hell: Binance’s affair with FTX was just a one-night stand. In a dramatic reversal, Binance, world’s largest crypto exchange, pulled out of a deal to acquire its troubled rival exchange firm FTX, mere 24 hours after it had agreed to a take-over. Facing a liquidity shortfall of up to $8 billion, FTX CEO Sam Bankman-Fried (aka “SBF”) had scrambled to raise money from investors or face a risk of extinction.

Quick recap: 5th largest crypto exchange, FTX was until recently thought to be doing fine. The crash is linked to the FTX exchange and his trading firm Alameda Research. FTX had $16 billion in customer assets of which he gave away $10 billion to Alameda who blew it all. This caused panic with depositors rushing to withdraw their money triggering liquidity crisis for the exchange. Recently valued at $32 billion, it was to be bought for $1 by Binance, but that too proved too pricey for Binance once it found skeletons in FTX’s financials. 

Our Take

This collapse has singlehandedly wiped-out whatever confidence was left in the asset class. The combined crypto market cap fell by over 5% in a single day and is now below the psychological $1 trillion level. In a year of explosions like Luna, BlockFi, Celsius, and Voyager, FTX collapse was the last thing they needed.

But why so serious?

SBF rose from nothing to one of the most-known faces in crypto arena earning comparisons to Buffet and J.P. Morgan. He frequently visited Washington, DC, to work with lawmakers on regulating the cryptos. Ironically, SBF has helped bail out several crypto firms during previous crashes only to be left alone to die when his time came.

SBF’s net worth has plunged by 90%+ making it the worst one-day wipeout for a billionaire ever tracked by Bloomberg. Along with it, Softbank (FTX investor) has burnt its hands which was already smoked by the US tech rout. Sequoia Capital also wrote down its FTX investment to zero dollars. While the memes are back in full force, it will take a long time for the investor money to make a comeback, if it ever will.  

Meanwhile, crypto Investor’s never-ending dilemma

MONEY MATTERS 💰

We have introduced a new section in our wrap where we shall take up one personal finance query we get from our readers and give our view on the same. This week we look at Investing in the US markets.

US Investing: Right time to enter? 

I love my India: Indians often take a very concentrated bet on investments. We keep hearing about stuff like “this decade belongs to India” or “Indian market is decoupling from the world”. This optimism in India’s growth story reflects in our investments too. As per a study by Morningstar, Indian and Chinese funds have the highest weights to their own home market, standing at a whopping 98%. This preference could be a result of familiarity or even a lack of options. The recent limits by RBI on overseas investments also explain this home bias.

Should we spread our wings? International funds can give investors exposure to global companies and also bring currency diversification into their investments. For people with financial goals related to foreign spending like children’s higher education, vacation could also consider this option. In the last 10 years, the Sensex and DJIA have shown a low correlation of 0.36 providing opportunities for diversification benefits.

Our Take

The Nasdaq 100 Index has fallen by more than 30% YTD in 2022 due to weak macroeconomic conditions as well as a slowdown in tech companies which forms more than 50% of the index.

The latest US inflation numbers which came at 7.7% for October have given some breather indicating that the inflation numbers have peaked and are now beginning to moderate.

Even if Indian markets have outperformed the US markets, geographical diversification should be built into the portfolio, because this outperformance and decoupling cannot last forever. It makes sense for long-term value investors to invest in good quality beaten-down US scrips that have solid growth prospects over the next 5-7 years. To know more about how to gain exposure to US markets, do give our blog a thorough read. 

Source: Livemint

What else made news?

🛑Sorry, I erred: After Twitter, Meta announced layoffs of 11,000+ employees as part of its streamlining efforts. That’s 13% of its workforce.

🛍Retail therapy: After much speculation, Reliance finally snapped up the India business of German retailer METRO Cash & Carry for $500 million. 

🏃Back to pavilion: Indian diamond merchant and fugitive Nirav Modi lost his appeal in the UK High Court and now faces extradition in the PNB loan scam case

⚠️Shutting down: Indian govt may shelve 116 crucial infrastructure projects worth $15+ billion due to age-old land acquisition problems, bureaucratic red tape, and Centre-state tussles. 

🤝4G nod finally: Govt approved ₹26,800 crore TCS and BSNL deal for a nationwide rollout of 5G sorry 4G services by early 2023, a huge delay when a 5G roll out by pvt players is already underway. 

Hope you liked reading this week’s wrap. See you next week. Till then, hope you have a great weekend!

Cheers,

Ruchi Mehta

https://www.linkedin.com/in/ruchimehta-tavaga/

Disclaimer: This write-up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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