The government’s decision to increase the Securities Transaction Tax (STT) on options trading to 0.05% from 0.017% is unlikely to have any major impact on tax collection, calculations based on the NSE volumes showed.
At the current annual premium turnover of R4.11 lakh crore on options, the exchequer will garner Rs 205.9 crore based on revised STT rate – R135.9 crore more than what it would have received otherwise. To arrive at this estimate, the turnover numbers were annualised based on NSE data available since September 2015.
As per tax regulations, the STT rate is applicable only on the sell side of an options trade. On the other hand, traders who exercise options pay an STT of 0.125%. The STT rate on trading of futures has been kept unchanged at 0.01%.
“I don’t think the increase in STT would have any significant long-term impact on the options markets, as the tax payable is computed on the premium turnover, which is much less than the actual turnover. However, in the short term, there might be some fall in volumes as high frequency traders will have to tinker their systems,”said Yogesh Radke, head of quantitative research at Edelweiss Capital.
Options have become a lucrative derivative segment in the last decade due to lower STT rates applicable compared with futures. Since FY10, the turnover in options segment has increased more than five times, surpassing that of the futures segment. In 2016-17 so far, the total turnover in the options segment of NSE has touched R445.24 lakh crore, and is nearly four times the traded value of futures during the period.
In the last few years, volumes in the futures segment have been impacted due to migration of trading activity to Nifty futures traded on the Singapore Exchange ( SGX) to benefit from lower transaction costs and prior uncertainty over the general anti-avoidance rules (GAAR).
“The minor increase of STT on option premium is not expected to move the balance away from derivatives in India to the underlying equity market. Therefore, the current structure of the market should remain intact going forward,” said Ashish Kumar Chauhan, MD & CEO, Bombay Stock Exchange.
While the STT rate on options has been hiked, the Budget has incentivised trading from investors located in international financial services centers (IFSCs).
Finance minister Arun Jaitley has not only exempted STT on transactions made by units located in IFSCs,
he has also waived off dividend distribution tax and announced lower rate of minimum alternate tax for such units.