The reduction in securities transaction tax (STT) in the Budget left the markets cold. There are many reasons why it is so.
For one, even after the reduction, transaction costs on delivery-based trades aren't low. STT on delivery-based transactions is reduced from 0.125 per cent to 0.1. On a transaction of Rs 1 lakh, the outgo on account of STT will be reduced from Rs 125 to Rs 100. While there is a reduction, securities tax still accounts for over 35 per cent of transaction cost on delivery-based transactions.
STT on derivative
Again the increase in service tax on brokerage from 10 to 12 per cent will also increase transaction cost, albeit marginally. For a transaction of, again Rs 1 lakh, service tax will increase from Rs 10 to Rs 12.
However, delivery based transactions account for only a small proportion of overall trades. The Finance Minister has left STT on futures and options unchanged at current levels. To ensure adequate liquidity, transaction tax on equity derivative transactions need to be done away with in toto.
Unlike investors who take delivery, those who trade derivatives churn their shares many times during the day. They play for smaller profits at greater frequencies. The proportion of securities transaction tax as part of their profit is, therefore, quite significant.
On the other hand investors who take delivery hold the shares for longer time and play for larger profit. Securities transaction tax thus hurts them much less than it does derivative traders.
Globally many stock exchanges impose securities transaction tax or stamp duties on cash-based equity transactions. These include exchanges in Indonesia, South Africa, UK and US.
But most exchanges shy away from imposing transaction tax on derivative transactions.
The Indian experience has also been that volumes in both cash and derivative segment on the exchanges have suffered once STT was imposed.
There is also the increase in volume on overseas traded instruments such as SGX Nifty that show that foreign investors could be shifting their activity to other geographies. .
That said, solace can be derived from the fact that FM has not imposed fresh taxes on nascent segments of Indian financial market such as commodities trading or exchange-based trading in currency derivatives.