Know, how this budget will provide relief to option traders?
Reform, Perform and Transform
Budget 2019 was presented last week. There have been lot of deliberations around it, whether it was a good, bad or an average budget. But such discussions initially create more heat and less light. It is only in the coming days that it’s impact will slowly unfolds that we realize its impact. One such impact was the part where they are planning levy additional surcharge on non-corporate entities with annual income more than 2 crores and 5 crores each. This pushes their effective tax rate to ~38% and ~43%. The budget speech analyses focused more on individuals who would be taxed higher. It was on Monday that the market realized that it covers all other entities including trusts. With nearly 70% of FIIs registered in India as trust and all Category III AIF being trusts, this was clearly a big market deterrent and we came off sharply.
Clearly, any economy has two crucial economic policies to follow. One is the monetary policy which is declared by the central bank, in our case the RBI and the fiscal policy which is the budget. While monetary policy focuses on price of money and supply of money; fiscal policy talks about the income and expenditure. So, fiscal policy tells us how the government will earn in the form of direct and indirect taxes & where it will utilize this income, may it be for infrastructure, subsidy, social schemes, defense and so on.
Few quick takeaways were:
- The fiscal deficit target was maintained at 3.3% of GDP.
- Government has revised downwards the FY20 revenue estimates by 4% as the significantly lower base of FY19 was partially offset by tax increases.
- No-tax revenues (disinvestments and RBI/PSU dividends) has been raised. Also the devolution to the states has been reduced somewhat.
- As a result, the Govt has been able to maintain the expenditure targets as per the interim budget presented in february’19.
- The Govt has proposed to the SEBI that the promoter holding limit be brought down from 75% to 65%.
- Income tax concession limit on mortgages raised from Rs200k/year to Rs350k/year for houses priced less than Rs4.5m.
- A very negligible 0.15% increase in tobacco taxation
One interesting shift has been change in the STT calculation for ITM options. Previously, they were calculated on spot price, but now it has been moved to difference between stock and strike price. So, if you buy a Call option of strike Inr 100 for a stock quoting at Inr 98 and on expiry the stock closes at Inr 110. In previous situations the STT would bave been 0.125% of 110. This has now been modified as a difference between spot and strike, which in this case comes to Inr 10. So instead of Inr 110/-, STT would be calculated on Inr 10/-.
This reduces the stress of covering all the ITM positions, which used to trade at a discount because of the STT issue. Now, that this problem has been plugged it comes as some relief for option traders.
Happy Trading.
Cheers!!!