Transaction tax deals a big blow

OUTLOOK/ Government securities

The Union budget presented on July 8, 2004, proved to be a major disappointment for the government securities market. The introduction of transaction cost for debt deals routed through stock exchanges is expected to hit volumes.

Market feels the ten-year benchmark security is likely to remain stuck at 5.86-90 per cent till the time a clarification comes on the transaction tax issue.

Trading in the government securities market virtually came to a standstill after the government clarified that all bonds traded on stock exchanges will come under the transaction tax net.

While the Reserve Bank of India has taken up the matter with the government, the market is still puzzled regarding the outcome of such talks.

Vipul Ambani, a member of the Fixed Income Brokers' Association, the community affected the most with the introduction of the transaction tax, said the proposal has not take into account the impact of such a tax on the bonds market as the volumes are high here.

The new tax will lead to an increase in offmarket deals, which will in turn lead to a lack of transparency and liquidity. With high bid-ask spreads, ultimately the borrowing cost by the government will go up.

Almost 80 per cent deals in the debt market are through the wholesale debt market (WDM) segment of the National Stock Exchange. The rest of the deals are carried out over the counter.

Dealers said that though the deals are done over the telephone, the reporting to the WDM segment is in the form of a transaction, which necessitates application of the tax.

The budget provision requires payment of a 0.15 per cent tax per purchase of securities on the stock exchange platform. This amounts to Rs 75,000 per deal of Rs 5 crore, whereas the brokerage fee is Rs 2000.