Sensex falls to three-month low; budget stokes inflation, tax worries

MUMBAI (Reuters) - The BSE Sensex fell on Thursday to three-month low as state-run lenders declined after the government announced a higher-than-expected gross market borrowing target as part of its 2013/14 budget, raising concerns about liquidity in the banking system.

A government proposal to raise taxes on certain individuals and companies also raised concerns, while worries about double tax avoidance agreements also hit shares after the finance ministry said tax residency certificates were no longer sufficient to claim benefits.

(Budget 2013: Chidambaram increases spending, taxes the rich, click here)

(Rich taxpayers to pay 10 percent surcharge, click here)

A perception that the government lacked major initiatives to woo foreign investors added to the disappointment given net inflows from abroad play a key role in share performance.

"Inflationary expectations and tax uncertainty are weighing on the market, but I am sure the finance minister would give clarifications on to avoid any further loss of confidence," said Deven Choksey, managing director, KR Choksey Securities.

The benchmark BSE Sensex fell 1.52 percent, or 290.87 points, to end at 18,861.54, hitting its lowest close since November 27, 2012. It was down 5.2 percent for the month, snapping a three-month gaining streak.

The broader Nifty fell 1.79 percent, or 103.85 points, to end at 5693.05, closing below the psychologically important 5,700 level, and falling 5.7 percent for the month.

Investors expressed broad disappointment over the budget, with incentives such as reducing the securities transaction tax on equity futures and imposing a transaction tax on futures contracts of non-agricultural commodities not seen as big enough to sway investors.

(Budget 2013 highlights, click here)

Shares in public sector banks fell on concerns about liquidity in the banking system after the government set its target for gross market borrowing at 6.29 trillion rupees in 2013/14, above estimates of less than 6 trillion rupees.

State Bank of India fell 6 percent, Punjab National Bank (PNBK.NS) ended 5.5 percent lower, while Bank of India (BOI.NS) fell 5.7 percent.

Private sector lenders also fell, with ICICI Bank (ICBK.NS) down 4 percent, after the finance minister proposed to extend a scheme that provides farmers with low-cost loans to private banks.

A surprise hike in tax on sports utility vehicles hit Mahindra & Mahindra (MAHM.NS), sending the auto maker down 2.1 percent.

Shares of Suzlon Energy (SUZL.NS) slumped 34 percent after its promoters sold a 6.19 percent stake in the open market.

Shares in Adani Ports and Special Economic Zone Ltd (APSE.NS) fell 3.2 percent after the finance minister proposed setting up two new ports in Andhra Pradesh and West Bengal, raising worries about more competition in the sector.

However, among stocks that gained, Indian education-related companies rose after the allocation to the ministry of human resources and development was increased to 658.67 billion rupees.

Everonn Education Ltd (EVED.NS) ended 2.3 pct higher after gaining as much as 15.5 percent earlier.

(Additional reporting by Manoj Dharra; Editing by Sunil Nair)