The finance minister managed to partly meet the demands of a vast section of market participants by reducing the securities transaction tax (STT) on certain categories of trades.
While welcoming the finance minister’s move of reducing STT for some categories, market experts said that the government could have done a better job by reducing the tax on delivery transactions, which could have also led to a decrease in speculative trading.
While presenting the Budget 2013-14, finance minister P Chidambaram reduced STT on equity futures from 0.017% to 0.01%. The FM, however, did not make any changes to the STT rates for cash market transactions. Moreover, for mutual funds (MFs) and exchange-traded funds (ETFs), the STT component has been cut from 0.25% to 0.001%.
Finally, for the sale or purchase of MF units or ETFs on the stock exchange platform, the levy has been reduced from 0.1% to 0.001% and will be borne only by the seller.
“The reduction of STT across financial instruments will provide a boost to the capital markets,” said Naresh Makhijani, partner (tax) – banking and financial sector, KPMG. In a similar context, Aashish Somaiyaa, CEO, Motilal Oswal AMC, said: “STT reduction on ETF is a further boost to aiding returns with lower transaction costs.”
STT was introduced by the government in 2004 on sale and purchase of equities and, according to rough estimates, accounts for a substantial part of the overall transaction costs in the stock market.
Ever since the tax was imposed on stock market transactions, traders and industry associations have been demanding for a reduction in the rates.
It is said the additional cost component has hit the already-thin margins of arbitrageurs and jobbers that provide the much-needed liquidity to the stock markets
Incidentally, even the capital market regulator has acknowledged the fact that trading costs are high in India and measures need to be taken to bring them down.