Most states agree on Union proposal for key change in levy; if done, capital market trading cost will see a sharp fall.
Trading costs in the capital market may come down substantially, with most states agreeing to a Union finance ministry suggestion to levy stamp duty only on the seller. This, if accepted, would be a major shift from the existing practice of levying the duty on both the buyer and the seller.
As part of a revamp of the proposed Indian Stamp (Amendment Bill) Act, the ministry has proposed a uniform duty on securities transactions, to be collected by stock exchanges and passed on to the states where the seller is based. Rough estimates say the cost may come down by half in the proposed system.
The finance ministry has proposed a 0.010 per cent stamp duty on every delivery-based transaction, as well as for delivery-based proprietary trades. For non-delivery trades in the cash segment, the proposal is for 0.002 per cent duty on the trade value. Non-delivery based proprietary trades in the cash segment will attract 0.001 per cent stamp duty of the trade value.
On delivery-based transactions, states like Maharashtra and Delhi charge Rs 1,000, while Tamil Nadu charges Rs 600, on every Rs 1 crore worth of trades. In proprietary trades, these states charge Rs 200 stamp duty on every Rs 1 crore of trade. The stamp duty in Uttar Pradesh is the highest, at Rs 5,000 on delivery-based transactions for every Rs 1 crore worth of trade.
The Centre can authorise exchanges to collect the duty on behalf of states once the Act is amended, but on the rates, a final call will be taken by the states. The Union ministry has concluded discussion with other departments and the states on the Bill, which proposes to amend the over 100-year-old Act. The official said most states had agreed to the ministry’s proposals. The ministry may soon seek Cabinet approval for introducing the Bill in Parliament.
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Though some states have adopted the Indian Stamps Act, most states have their own legislation on stamps.
The reason behind roping in stock exchanges is to collect the duty in a centralised manner and simplify the process. At present, states follow different routes for collecting the duty.
Background
In March this year, the state of Maharashtra — which accounts for 40 per cent of equity volumes on the country’s two biggest exchanges — had doubled the stamp duty on equity transactions. (The state collects Rs 40-50 crore as stamp duty from stock market transactions every year). This initially led to a fall in equity transactions.
Apart from this, trading volumes coming from Delhi had also crashed in the currency and equity segments when the government started imposing stamp duty from this year. A majority of jobbers and arbitrageurs in the stock market, often known as market makers due to their ability to generate high liquidity, had to discontinue their business in the equity market as a consequence of the turmoil on stamp duty and overall higher statutory costs.
Most have also shifted to the commodity segment, where there is no Securities Transaction Tax (STT).
Arbitrageurs purchase and sell the same security at the same time in different markets, to take advantage of a price difference between the two, mainly the cash and the derivatives markets. A jobber trades in a particular stock, mainly in the cash market. They thrive on short-term volatility and treat income from such transactions as business income. Thus, high cost of trading can hurt them badly.
“Charging stamp duty itself is unconstitutional as it amounts to double taxation. Already, as per the Constitution, every state gets 30 per cent of their share from a central tax like STT. So, collecting additional stamp duty is just not fair.
This is the reason that even while benchmark indices are just 20 per cent below their all-time high, there is a bear market. This is because there are no trading volumes and market activity is at a nadir," said a Mumbai-based broker.