STT proposals may prove a big drag

In a surprise to the stock markets, the Finance Minister has proposed an increase in the Securities Transaction Tax (STT) for options in the Budget. The STT has been increased by almost three-fold — from 0.017 per cent to 0.05 per cent of the option premium. This rate is applicable on the sell side transaction when the option is not exercised. This bolt from blue comes at a time when the market was expecting to do away with the STT completely.

Among the various securities traded in options, the index options contribute the most to the total turnover. The Securities and Exchange Board of India data show that in the BSE and the NSE, the index options contributes over 98 per cent and 72 per cent of the total turnover among all the derivative instruments respectively.

The three-fold increase has to be paid from the pocket of the trader but it has attracted mixed response from the market. “The rupee impact of this increase will not be much and it may not be a big negative for an option trader as the tax is calculated on the premium,” says Nithin Kamath, Founder & CEO, Zerodha. Siddharth Bhamre, Head — Equity Derivatives & Technicals, Angel Broking, concurs with this. “The three-fold increase in the STT might look big in terms of percentage but, when it comes to real cost in terms of rupee it might not impact the trader much,” he said.

Both do not expect this increase in tax to have a negative implication on the trading volumes in the exchanges going forward.

But, an active options trader in the market has a different view. Sakthivel Nathan, an active options trader based out of Chennai says, “last year if I had spent ₹5,000 against the STT and if it is going to go up three-fold to ₹15,000 next year, then it is definitely a big cost for me.” He also adds that brokerage and STT are the major costs for a trader and a trader has some control in minimising the brokerage charges by choosing a low-cost brokerage; but the outflow in terms of STT cannot be controlled or minimised. So, any increase in the rate whether it is small or big is a cost to many option traders, according to Sakthivel.

The combined volume in the options segment in the exchanges has been rising constantly even after the introduction of the STT in 2004. The pace of rise in volume — which declined to an average of 26 per cent between 2011 and 2014 — had shot up in 2014-2015 to 63 per cent. Whether the pace will slow down once again on the back of the STT increase will have to be seen.