The Securities and Exchange Board of India (Sebi) has put its weight behind market players, demanding lowering of statutory levy on share trading. Speaking at a public forum, Sebi chief U K Sinha on Friday said the Securities Transaction Tax (STT) was too high and the “regulator would like the government to look into the matter”.
The same sentiment, about lowering statutory costs, was echoed by former Sebi chairman C B Bhave on more than one occasion. Top officials from the National Stock Exchange (NSE), BSE, MCX-SX and United Stock Exchange too were in favour of such a move and had expressed their opinion to the finance ministry during a meeting in September.
At present, government tax like STT, stamp duty and Sebi fee, among others, on each transaction, form 55 per cent of the total cost for trading in the equity market.
STT was introduced by Finance Minister P Chidambaram in 2004 to circumvent avoidance of capital gains tax. STT is paid when you buy or sell a share and gets added to the price during the transaction. The flip side is that you end up paying this tax even if you have not made any gains.
For delivery-based transaction in equity and mutual fund units, STT is 0.125 per cent on Rs 1 crore worth of trades. In case of non delivery trades, the tax is 0.025 per cent. In equity derivatives, STT is only levied on the seller and calculated at 0.017 per cent per per Rs 1 crore.
“Traders will benefit more because of reduction in STT and volumes could rise. The real need is to create an environment which encourages delivery-based volumes,” said Deven Choksey, managing director at K R Choksey Shares and Securities.
More From This Section
“Reduction in STT will bring down the cost of transaction,” said Satish Menon, director of operations at Geojit BNP Paribas Financial Services.
It will make Indian markets more competitive vis-à-vis other global markets,”
While the cost of trading equity, including brokerage, in the US and Europe is around Rs 500 on trades worth Rs 1 crore, it is as high as Rs 1,300 in India, including Rs 850 as STT. While Rs 200 goes to the exchange, Rs 200 is paid as stamp duty and Rs 21 as service tax. Also, Rs 10 is collected by Sebi. In addition, there is a brokerage fee. If trades are delivery-based, they attract depository and demat charges as well.
While this may seem minuscule in percentage terms, it is a major burden, as traders can make profit in India only after 28 ticks, while in the US and the UK, just one favourable tick on the index futures can generate a profit. In the US, the spread on the S&P contract, or one tick, is 25 cents. Therefore, if a trader gets just one tick right, he can take home 20 cents, as the trading cost there is just five cents. This helps the US markets to be are more liquid.
Prior to 2008, STT was allowed as a rebate against tax liability under Section 88E of the Income Tax Act, if the income from securities on which the tax was levied was included under the head ‘profits and gains of business and profession’. This allowed brokers to pay less tax and generate more volumes.
The changes to the income tax rule on STT were announced in 2008 by Chidambaram, following which volumes crashed badly, giving a upper hand to short sellers. The new STT regime put arbitrageurs and jobbers, who generated nearly 30 per cent of volumes, out of business. Currently, trading sentiment is at a nadir due to low liquidity.
The NSE pays around Rs 5,000-Rs6,000 crore as annual STT and BSE between 1,500 to Rs 2,000 crore. Arbitrage trades have shifted to the commodity segment, as no transaction tax is levied. A Commodities Transaction Tax was discussed but but the finance ministry put off the proposal.