Initiatives announced in the Budget by Finance Minister Pranab Mukherjee for the capital markets will make little difference for equity market players. In fact, the much-anticipated cut in Securities Transaction Tax (STT) will get negated by the rise in service tax, say experts.
Brokers say, Mukherjee’s 20 per cent STT cut on delivery-based equity transactions will do little in curbing excessive speculation and boosting equity investments. The STT cut is negated by the two per cent increase in service tax applicable on stock exchange transactions and brokerage fees.
An STT of Rs 12,500, which was charged on every Rs 1 crore worth of delivery based transactions, has been reduced to Rs 10,000. On non-delivery trades STT of Rs 1,700 is charged on every Rs 1 crore worth of trades, which has resulted in increase in derivative volumes, while cash trades have been decimated. Annual STT paid by both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) is Rs 5,000-Rs 6,000 crore, of which tax collected on delivery-based transactions is around Rs 600 crore. A 20 per cent reduction on this figure means annual STT savings of Rs 120-Rs150 crore, depending on volumes. Delivery transaction on BSE and NSE combined are 10-12 per cent of overall average volumes of more than Rs 1,50,000 crore daily.
“STT cut is too little. Abolition of tax on delivery transactions could have fired arbitrage trades and increased market depth, much required in the current scenario,” said Rajesh Baheti, managing director (MD), Crosseas Capital.
Arbitrage trades shifted to the commodities segment after changes to the income tax rule on STT were announced in 2008. Earlier, STT was allowed as a rebate against tax liability under Section 88E of the Income Tax Act.
While the cost of equities trading, 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, of which STT constitutes Rs 850. While it may seem minuscule in percentage terms, it is a major burden, as traders can make profits in India only after 28 ticks, while in the US and the UK, just one favourable tick on an index future can generate a profit.
Apart from the STT cut, Mukherjee introduced the Rajiv Gandhi Equity Saving Scheme, which will allow income tax deductions for retail investors on investment of Rs 50,000 for a period of three years.
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“If mutual fund schemes qualify for Rajiv Gandhi scheme, it is a major boost for fund houses and increase participation. There would be no immediate impact on markets but a new tax saving category has been created on the lines of equity-linked saving schemes,” said Rajiv Deep Bajaj, MD of Bajaj Capital.
To simplify the process of initial public offers (IPOs), companies raising Rs 10 crore and above will have to allow bidding in electronic form. Also, companies will have to allow electronic voting facility to provide opportunities for wider shareholder participation. Both these moves will help BSE and NSE attract more participants. Already, there is intense lobbying by exchanges to attract companies or share sales on their platforms.