In a move that could bring cheers to the stock markets, a Parliamentary panel today recommended abolition of the Securities Transaction Tax (STT) on equity trade.
The Parliamentary Standing Committee on Finance, which submitted its report to Lok Sabha Speaker Meira Kumar today, also suggested that the government should modify the procedure for levying the capital gains tax to avoid evasion.
"The Committee would recommend that the Ministry may explore the possibility of abolishing the Securities Transaction Tax (STT) ... The distinction between listed and unlisted securities should be removed," the report said.
The government had introduced STT in 2004 on transactions in different types of securities. The rate varies from 0.025% to 0.25% depending upon the type of security traded and transaction -- whether sale or purchase.
The government collects around Rs 7,500 crore per annum from STT and it would be difficult for it to forego the revenue at a time when efforts are needed to raise revenue and bridge the fiscal deficit, which during the current fiscal is likely to exceed the budget target of 4.6% of the Gross Domestic Product (GDP).
The Capital Markets division of the Finance Ministry has been pushing for lowering of STT as it would boost investor sentiments, while stock exchanges are seeking removal of the levy as it would reduce transaction cost, promote equity culture and encourage retail participation.
It is widely expected that Finance Minister Pranab Mukherjee would reduce STT in his forthcoming Budget to be presented to the Lok Sabha on March 16.
The Standing Committee further suggested that the government should calibrate the Capital Gains Tax regime – both short term and long term.
"It should also be ensured that companies do not escape paying capital gains tax on the basis of DTAAs," the report suggested.
Under the present Double Taxation Avoidance Agreement (DTAA) regime companies avoid payment of capital gains tax by routing their investments through tax havens.
The issue of levying capital gains tax is under discussion with several countries including Mauritius from where the bulk of the foreign investments are routed.
