Talking Money

GUEST COLUMN

Lift The Levy On Transactions In Securities MR Mayya   The tremendous sagacity which the Honourable Finance Minister has displayed in presenting a balanced Budget in tune with the objectives underlying the National Common Minimum Programme is indeed commendable. But unfortunately, the balance is missing in the approach relating to the proposed tax on transactions in securities on stock exchanges, particularly so as the operations on stock exchanges are sensitive and highly volatile. It is, however, comforting to know that the Finance Minister is willing to relook at the turnover tax. The Finance Minister has proposed to levy a tax at the rate of 0.15 per cent (which works out to Rs 150 per Rs 1 lakh) on the value of all the transactions of purchase of securities that take place on a recognised stock exchange. Securities for this purpose include shares, scrips, stocks, bonds, debentures, debenture stock, derivatives, Government securities and rights or interest in securities. Finance Minister has advanced the argument that the "transaction tax is efficient, neat, non-regressive, eliminates tax avoidance and everybody contributes to the exchequer." This is, no doubt, true so far as the collection of tax is concerned. Its impact on stock market transactions, however, also needs to be taken into consideration. According to an expert study conducted by two eminent IMF economists, Karl Habermeier and Andrei Kirilenko, "transaction taxes or such equivalents as capital controls can have negative effects on price discovery, volatility, and liquidity and lead to a reduction in the informational efficiency of markets". The study also points out that "If trading becomes costly, as a result of transaction taxes, dealers cannot manage their risks effectively". Most of the countries that have experimented with securities transaction taxes are now having a re-look in the matter. Even in countries where the transaction tax is in vogue, they are either on a high base or exempt critical elements from the tax. In France, an allowance of 150 francs is applied to the tax on each trade, which means that transactions valued below approximately 50,000 francs are effectively exempt from the tax which is levied at the rates of 0.3 per cent and 0.15 on transactions below one million francs and above one million francs respectively. In Belgium, where the rate of transaction tax on stocks and bonds is 0.17 percent and 0.07 percent respectively, financial intermediaries trading on their own behalf (whom we call as day traders), some institutional investors and non-residents are exempt from the tax. There is also a ceiling of 10,000 Belgian francs on the aggregate amount payable by both the buyer and the seller. It also has a 0.14 percent stamp duty but applicable only to off-stock exchange transactions. In Switzerland, the stamp duty of 0.15 per cent and 0.3 percent on transactions in Swiss securities and foreign securities respectively is not applicable to foreign institutional investors, investment funds, social security organisations, pension funds, life insurance companies and domestic investment funds. In the US, the levy is just a token amount of 0.003 percent which means $ 3 per $1 lakh. Japan, which had a tax of 0.12 per cent of the sale price for those with a license, and 0.3 percent for those without a license, has dispersed with the tax in April 1999. Germany, Sweden and Finland abolished the tax in the early 1990s. Canada and the Netherlands do not have any tax. The emerging markets like South Korea, Taiwan and Indonesia, which have levies varying from 0.10 to 0.3 percent on sales, are seriously considering either reducing the rates or altogether dispensing with the same. It needs to be noted that there is no transaction tax in any of the global markets on derivatives while the Finance Minister's proposed levy encompasses derivatives. Amazingly on options, the value of taxable securities is the aggregate of the stock price and the option premium. Besides the tax on transactions, the service tax (which itself is raised from 8 per cent to 10 per cent) is extended to forward contract service (60 per cent of the stock market transactions are presently in the forward segment) and to sub-brokers. The impact of the levy on day traders, arbitrageurs and jobbers, who constitute the backbone of the market and who provide the liquidity to the market constantly buying and selling at small bulges in prices, would be serious. Not only the spreads would widen, but also the volatility of the market would increase, particularly because of the large orders of purchases and sales FIIs place at the slightest provocations. Operations of stock brokers, who work on razor-thin margins, brokerages being as low as 0.25 per cent on deliveries and 0.08 per cent on bolt purchases and sales in respect of non-deliveries (inclusive of Sebi levy of 0.01 per cent, and service tax) will also be seriously affected. It is not only necessary to completely exempt the day traders, arbitrageurs and jobbers from the proposed levy, retaining it only on deliveries, preferably at a lower rate of say 0.05 per cent (which works out to Rs 50 on a transaction value of Rs 1 lakh), but also not to deny the benefit of zero tax on long-term capital gains and 10 per cent on short-term capital gains to these intermediaries - a move reported to be under consideration of the Finance Minister. The better numbers that he has been asking for can be say 5 per cent on long-term capital gains, and 15 per cent on short-term capital gains. Another alternative is to withdraw the exemption of dividends in the hands of shareholders from tax as that would "strike a fine balance among the three mutually re-inforcing objectives of growth, stability and equity" adumbrated by the Finance Minister. Instead, the dividend distribution tax presently payable by companies may be withdrawn and the dividend may be taxed in the hands of shareholders subject to an exclusive exemption limit of say Rs 25,000 under section 80 L of the Income Tax Act which will help to soften the blow to the stock market sentiment by the withdrawal of tax on dividend in the hands of shareholders. If this is also not acceptable, cess at the rate of say 10 percent may be imposed on the dividend distributed by companies. Will the Honourable Finance Minister kindly consider the above suggestions? The author is ex-chairman of ISE & ISS

URL: http://www.financialexpress.com/fe_full_story.php?content_id=63833 Print this Story Expressindia | The Indian Express | The Financial Express | Screen | Kashmir Live About Us | Advertise With Us | Privacy Policy | | Labelled with ICRA © 2005: Indian Express Newspapers (Bombay) Ltd. All rights reserved throughout the world. Top | Close this window