As part of the government’s efforts to rationalise the Securities Transaction Tax (STT), the finance ministry has taken up a revenue-neutral proposal of the stock exchanges that seeks to reduce the tax by 40 per cent and compensate 30 per cent of revenues lost on account of an expected rise in volumes.
The proposal came after a global study of levies on equity trading around the world. It was discussed this week at a meeting of the ministry with the country’s stock exchanges and the Securities and Exchange Board of India (Sebi).
A senior official from one of the exchanges who attended the meeting said the proposal needed to be statistically tested, as it had many variables that might not be applicable in the Indian context.
| SECURITIES TRANSACTION TAX: NUTS & BOLTS |
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The stock exchange and other market participants have been asked to submit their proposal to Sebi, which will pass it on to the finance ministry with remarks and suggestions. Sebi Chairman U K Sinha, on his part, has already announced that STT needs rationalisation. Any final solution is expected only in the Budget announcement, in March 2012.
A senior finance ministry official said the next round of consultation was expected to take place early next month and a final road map, with various options, would be finalised for taking decision in the matter “sometime in December”.
STT earned the state exchequer a revenue of Rs 6,000-Rs 7,000 crore annually. Unless the finance ministry thought of a revenue-neutral way, even a partial removal of the tax would face strong resistance from the revenue department, said sources involved in the deliberations.
The ministry has undertaken the review of STT on demand from market participants and proposal from stock exchanges, as volumes in the equity market have crashed by 40-50 per cent from the 2008 levels. Traders are not willing to participate in equity market, as statutory levies in India are higher than any other market around the world.
Currently, an STT of Rs 1,700 is charged for non-delivery and Rs 2,500 on delivery, on the basis of trades in every Rs 1 crore worth of volumes. Statutory levies in the equity market form 55 per cent of the total cost of trading in the equities segment in India.
Stock exchange officials who met finance ministry officials said the most reasonable solution could be switching to the earlier STT regime, which allowed a rebate. “Otherwise, the removal of STT may lead to the re-introduction of long-term capital gains tax. This will be worse for the markets, which are already reeling under pressure,” said an exchange official in Mumbai.
Recommendations like increasing STT in non-delivery trades (derivatives) and removing it in delivery-based trades were also discussed. If STT is increased in non-delivery trades, introducing physical settlement would be a better way, as traders would get an option of delivery and not pay STT.
STT was introduced by P Chidambaram in 2004, during his term as the finance minister. Then, it was considered a neat and efficient way of computing tax on profit incurred from the sale of securities, which nullified the scope of tax avoidance. STT is applicable at different rates on the value of the taxable securities transaction and, with its introduction, the government removed the long-term capital gains tax.
However, equity market participants started feeling the burden of STT only since 2008, when, once again under Chidambaram, the tax collection rules were tweaked. Before 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. However, the change in rules made equity business unviable for brokers involved in jobbing and arbitrage trade and they shifted to commodity segment, where no such tax was applicable. Average daily trades of over Rs 50,000 crore are carried out in commodity market now, which is a near 50 per cent rise since 3-4 years ago.
While the cost of trading in equity, including brokerages, in the US and Europe, is around Rs 500 for trades worth Rs 1 crore, it is as high as Rs 1,300 in India. This includes Rs 850 as STT. While Rs 200 goes to the exchange, Rs 200 is paid as stamp duty, Rs 21 as service tax, and Rs 10 is collected by Sebi. In addition, there is brokerage. If trades are delivery-based, they attract depository and demat charges too.
While it 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 index futures can generate a profit. In the US, the spread on the S&P contract, or one tick, is 25 cents. So, if a trader gets just one tick right, he can take home 20 cents, as the trading cost there is just five cents. This is the reason why the US markets are more liquid.
