It is hard to comprehend the rationality in the changes that the Budget has made in tweaking the securities transaction tax (STT) in equities and in introducing commodities transaction tax.
It is proposed to reduce STT on equity futures alone, leaving out equity options that account for the bulk of the trades. The FM has also left out cash-based transactions out of the ambit of the STT reduction.
Further imposition of commodity transaction tax is expected to yield a meagre sum to the exchequer, while it can do much harm to a nascent segment of Indian financial market.
The budget proposes to reduce the securities transaction tax on sale of equity futures from 0.017 to 0.01 per cent. This will reduce the transaction cost per Rs 1 lakh of transaction from Rs 17 to Rs 10. Tax that will be foregone by the Government through the reduction in STT will be around Rs 500 crore.
But, there appears no need to tinker with STT on equity futures currently. There is already a shift from equity futures to equity options over the last five years. Share of equity futures in value of transactions on the NSE is down from 87 per cent in 2007-08 to 20 per cent in 2012-13. Equity futures were preferred by smaller traders on Indian stock markets since the product is similar to the erstwhile ‘badla’. But many small investors burnt their fingers through trading equity futures in the 2008. It is best to keep the traders away from equity futures.
Instead, the FM should have reduced the STT on equity options since these are more sophisticated products where the loss is limited to the premium paid, initial outlay is limited and complex strategies are also possible.
Why CTT?
The Finance Minister has also left the transaction tax on delivery-based transactions unchanged. The right way to go about this would have been to do away with the transaction tax on derivatives entirely.
Few global markets tax derivative transactions as traders work with very small margins reducing their ability to bear transaction cost.
The Finance Minister has brought in a commodities transaction tax in the Union Budget, but only on non-agricultural commodities. Sale of futures on non-agri commodities will be taxed at 0.01 per cent or Rs 10 a lakh of transaction now.
If we consider the turnover on the MCX for 2012 as an indication, this new tax is likely to yield between Rs 1,000-1,500 crore to the exchequer. But the commodity exchanges are of the opinion that imposition of the new tax is likely to impact volumes on the exchange, thus bringing down the tax collected further.
The Budget has now allowed set off of the commodities transaction tax paid, against business income, by those whose main business in trading in commodities.
This will help professional traders and arbitrageurs. But this will further reduce the revenue that the Government can raise from this avenue.
Edging out hedgers
With volumes of commodity exchanges stagnating in 2012, there is little need for the FM to bring in a new tax on commodities that will yield a small sum. According to Viral Shah, Head Institutional Business, Geojit Comtrade, those using the commodity exchanges to hedge their physical exposure in bullion and metal will now think twice before doing so. He also believes that transaction cost on commodity exchanges can now rise at least 50 per cent, thus impacting volumes at least in the short-term.