Some pain, several positives for stock market participants

The FM has hiked STT on options and imposed a 10% tax on dividend earnings beyond Rs 10 lakh, but has left capital gains tax alone and allowed foreign firms to up stake in Indian exchanges to 15% from 5%

There was some pain for investors in the stock market as the Union Budget announced an increase in STT on options to 0.05 per cent from the existing 0.017 per cent and imposed a tax of 10 per cent on dividends earned by an assessee in excess of Rs 10 lakh. This 10 per cent tax is over and above the dividend distribution tax (DDT) that a company must deduct in order to pay out the dividend to its shareholders.

However, experts believe the impact of these measures is limited. For instance, the increase in STT comes into play only when one sells the option, and will be charged on the premium value, not the contract value. At present, STT on normal option trades done on the exchange is 0.017 per cent of the selling side of the premium value. STT on buy option positions that get exercised is 0.125 per cent of the entire contract value. There is no change in STT for the latter.

For example, if you were to buy four lots of Nifty options at Rs 100, and sold the same back at Rs 100, then the break even on this trade would now be 100.05 instead of 100.017. "This does not make any material difference to active traders but the fact that STT has been raised does not send the right signal to the market participants," said Nithin Kamath, founder, Zerodha.

Read more from our special coverage on "UNION BUDGET 2016, STOCK MARKET"

• Stock market looks up to Union Budget for cues

"On an average if one considers the daily options premium turnover for the entire market to be around Rs 3,000 crore, the overall impact of the hike in STT will be about Rs 100 crore for the entire year, or roughly Rs 50 lakh per day," said Siddarth Bhamre, head-equity derivatives and technicals, Angel Broking.

Bhamre believes the impact on high net worth individuals and retail participants will be negligible. "It won't reduce trading volumes but some of the jobbers and arbitrageurs will see slight increase in cost," he said.

The levy of DDT of 10 per cent for those earning annual dividend income of Rs 10 lakh or more is targeted mostly at promoters who pay hefty dividends and ultra HNIs. "This measure could prove counter-productive as it may compel promoters with higher holding in companies to distribute less," said Deven Choksey, managing direcgtor, KR Choksey Investment Managers.

Assuming an average dividend yield of 2 per cent, one will have to own a portfolio of Rs 5 crore to get a dividend of more than Rs 10 lakh.

According to Manoj Purohit, director at Grant Thornton Advisory, this tax would result in discouraging investors to remain invested in equities for a long-term and in effect would accelerate exit from the equity market prior to declaration of dividend and book closure dates. It will also create disparity between resident and non-resident investors as non-resident investors have been kept outside the purview.

The proposal to tax dividend in the hands of resident individuals, HUF and firms will amount to multiple layer of taxation, said experts. First, the income earned by corporates will be subject to income-tax in the hands of the company, then DDT at the rate of 28.84 per cent will have to be paid by such companies on distribution of dividends and lastly additional DDT in the hands of investors whose dividend income is in excess of Rs 10 lakh.

The Budget had a number of positives for stock market participants. For one, it did not tinker with the existing capital gains tax norms. Market participants had expected the holding period for equities to qualify as a long-term capital asset to be raised to three years from the existing one year.

The Budget also allowed foreign firms to increase stake in Indian stock exchanges to 15 per cent from the existing 5 per cent, in line with the government's policy of allowing more FDI across sectors.

Foreign investors including the likes of Deutsche Boerse, Argonaut PE, SAIF Partners, Tiger Global and Singapore Exchange hold about 30 per cent in the National Stock Exchange and 25 per cent stake in BSE. Market regulator Sebi has recently amended the SECC norms to make it easier for exchanges to list.

The Budget has proposed an amendment to the Sebi Act in order to increase benches in the Securities Appellate Tribunal (SAT). This will help expedite cases as the SAT as only one Mumbai-based bench at present. The Budget has also proposed to bring in a comprehensive central legislation in to deal with Collective Investment Schemes (CIS) regulated by Sebi.