The securities transactions tax (STT) could become more market-friendly in Budget 2008-09, as the government may waive the levy on unexercised options.
The tax is levied on all equity market spot and futures transactions. Options are instruments in the futures market, which give the holder the right to buy a share at a future date.
Along with the proposal to exempt STT on unexercised options, the government could waive the tax on the strike price?the price at which a share is traded. The price of an option comprises its strike price and a premium. An STT of 0.017% is levied on both the strike price and the premium paid for buying the option.
To make good the loss of STT on the strike price, the government may increase the tax rate on the premium portion of an option. The departments of revenue and economic affairs, both under the finance ministry, have agreed to waive STT on options where the right to buy or sell is not exercised.
Analysts believe the tax waiver would deepen the options market, making it attractive for more participants. The market has a daily trading volume of nearly Rs 8,000 crore. Greater market participation will also swell the government?s coffers. STT collections have risen 78.19% to Rs 6,793 crore up to January 15.
In the last two years, various stockbroker associations have requested the government to waive STT on the strike price of unexercised options.
?Stock exchanges and their members would charge transaction fees only on the premium and not on the strike price. We have suggested to the finance ministry that STT should be waived on the strike price,? said Nirmal K Agarwal, president of the Association of National Stock Exchange Members of India.