The stock market is the usual target for any government in terms of using it as platform to garner revenue. The belief is that if people trade to make money, they can easily pass on a small part to the government. It is not surprising that we have a plethora of taxes on stock market transactions such as STT (securities transaction tax), service tax, education cess and stamp duty. Add to this the transaction tax that is levied by the enabler, the rate just multiplies. The Maharashtra government has almost doubled the stamp duty to be paid on stock transactions to 0.005% for all cash and derivative transactions. There are basically four constituents that would be affected by this move. The first is, of course, the government. Under status quo conditions, the government would get more revenue if transaction levels remain unchanged. On the face of it, the amount will not be much because on R1 crore of transaction, if the change moves from say R200 to R500, it should not matter. Not really so, if you are the second constituent in the form of a jobber or day trader who is actually trading on the price of a stock moving by one tick size. These are the ones who add liquidity and lower impact cost of trading. Higher taxes will make it less worthwhile to trade and there would be a disincentive to trade. Also, there will be incentive to change the location of the trading desk to more hospitable locations. As trading is online, it should not be an issue. But, what will stop other states from also imposing such a tax to bring parity?
This brings in the third constituent, the stock market. This is what we need to worry about. On one hand, we are trying to boost this market by popularising the equity culture, which, in turn, adds buoyancy to the capital market and investment climate and economic growth. On the other hand, there is this constant move to tax transactions in various forms. This will, in the medium run, affect confidence and send confused signals as we are talking of the DTC, where we are looking at a semblance of stability in the tax structures and simultaneously bringing in some arbitrary measures. The last constituent, i.e., long-term investors probably will not really bother about such enhancements in duties as they look more at the long-term returns where this increase may not matter. So which constituent should we be worried about? Clearly, it has to be the stock market in case we do believe that a robust and liquid system is necessary to foster growth.