As is the case every year, any mention of securities transaction tax (STT) in the Budget will be keenly followed. Ever since STT was introduced in the Union Budget 2004-2005, market players have been demanding either a complete rollback or at least a partial reduction in the rates. Currently, STT is charged at 0.125% for delivery transactions and 0.025% on non-delivery trades. In derivatives (futures and options), STT is pegged at 0.017% and goes up to 0.125% if an option is exercised. According to industry estimates, the government is understood to have realised around R5,000 crore as STT in the current financial year, compared to a target of R7,000 crore.
Brokers have already pitched for a reduction in STT while suggesting that it should be extended to all asset classes, including commodities. The markets are also hoping for a reduction in the dividend distribution tax (DDT); the dividend is exempt from tax in the hands of the investors but companies pay a DDT of 16.22%.
The broking and investment banking fraternity has also been demanding a change in the way tax is levied while tendering shares in an open offer. Since an open offer is an off-market transaction, long-term capital gains of 10% without indexation or 20% with indexation is charged. If such open offers are brought on the exchange platform, then only STT would be applicable.
Brokers will also be hoping that some market-friendly provisions of the Direct Tax Code (DTC) could be introduced in the Budget like a 50% deduction on capital gains for investments held for less than an year. Currently, such holdings are subject to short-term capital gains tax of 15% or 30% depending if STT is applicable. As regards QFIs, market players are hoping that the government will announce an investor-friendly process to get them registered to trade in the Indian market. It is believed that fulfilling PAN and know your customer requirements is a challenge for foreign investors.
There is also some amount of uncertainty around characterisation of income that acts as a deterrent for foreign investments. DTC has proposed some taxes on income of foreign funds, treating all incomes from their investments in the stock market as capital gains. The market also wants to see a uniform stamp duty across the country. Representatives of the Association of National Exchanges Members of India met with finmin officials this year and made a presentation on the manner in which STT could be lowered without the exchequer taking any hit.