The finance ministry is considering a cut in the tax on buying and selling of shares to boost investor sentiment, which has been hurt by the developments in the global markets, particularly in Europe.

According to a finance ministry official, the government is looking to reduce the securities transaction tax (STT) to encourage trading in shares. The STT is currently 0.017% for derivatives and 0.125% for non-delivery-based trades. The tax increases the cost of a share transaction in the Indian markets compared with jurisdictions where the tax is absent like in the US and most of Europe.

The reduction will attract foreign institutional investors to the domestic market at a time when India?s capital account surplus is seen to be much below the $72 billion estimated by the Prime Minister?s Economic Advisory Council for this fiscal. High inflation in India and signs of recession in many European countries have led to a flight of capital from Indian markets. FII inflows since January have been just $4.3 billion, against $39.5 billion in 2010.

However, the proposal to cut STT rates can sail through only if the government brings an ordinance and makes changes in the Finance Bill, said another source. The government has mopped up R7,500 crore through STT in the last fiscal and is estimated to collect roughly the same amount this fiscal from the tax introduced in 2005-06.

SMC Global Securities research head Jagannadham Thunuguntla said: ?If STT is reduced, it will decrease transaction cost and, thus, trading volume will rise. But it will be a very short-term rally and end up exacerbating the fiscal deficit.?

The Sensex fell 110.96 points or 0.69% on Monday to 16,051.10 as investors sold across sectors amid weak Asian markets on lingering fears about the euro-zone crisis. There was strong selling in consumer durables, metals, refinery and capital goods, which pulled down the gauge below the 16,000 mark in intra-day trade.

The government is also considering a cut in stamp duty on futures and options trading in equities to 0.003% and on forex derivatives trading to 0.0001%. Currently, stamp duty is levied by states and, hence, it varies across states. The finance ministry has proposed to make it uniform. However, the final decision will be taken by the Cabinet. Once the Cabinet decides that these duties can be uniform, there would be pressure on states to fall in line.

In India, in addition to STT, there is a capital gains tax of 15% if shares bought are sold in less than a year. But there is no tax (other than STT) for holdings of more than a year. According to Neeru Ahuja of Deloitte, STT is a more efficient system than capital gains tax, as there are more complexities involved in capital gains tax.

Said CNI Research chairman and managing director Kishore Ostwal, ?Cutting STT is more important than reducing stamp duty as it would reduce transactions cost of intra-day players and so trading volume could increase.?

No plan to curb capital outflows, says ministry

India has no plan to tax or impose restrictions on capital outflows, finance ministry?s principal economic adviser Dipak Dasgupta said on Monday, adding that the government will instead focus on liberalising fund inflows into the economy, particularly via overseas borrowing.

?I do not think we have anything to suggest to us any such thing,? Dasgupta said. ?Instead of trying to restrict the outflow, it is quite the opposite. In fact, what we are trying to do, as you have seen in the ECB (external commercial borrowing) regulation changes, is actually to make it a little more comfortable yet prudent to get inflows of capital to come to India.?

The Prime Minister?s Economic Advisory Council had projected in its July review that the country?s capital account would have a surplus of $72 billion this fiscal. However, with net FDI inflows not likely to be as high as the projected $18 billion and the sluggishness in other flows including portfolio inflows and ECBs, the surplus could be much less than what was projected by the council.