With volumes in the futures segment of the equity derivatives market in India struggling to take off — NSE’s futures volume in FY15 was 15% lower than that in FY08 — the government has decided to tap the thriving options segment for additional tax revenue by increasing the securities transaction tax (STT) on options. “Rate of STT in case of options is proposed to be increased from .017% to 0.05%,” finance minister Arun Jaitley said in his Budget speech on Monday.
Currently, the rate of STT in the options segment is 0.017% of the option premium, and is paid by the seller. As compared to this, STT in the futures segment is 0.01%, but is levied on the entire turnover.
It is this massive differential in STT that has made the options segment very lucrative for a whole host of traders, particularly jobbers and arbitragers, thereby ensuring a manifold rise in options turnover.
Even with the increase, STT on the same trade will increase to just about Rs 0.1, which will still be substantially lower than that for a similar trade in the futures segment or cash segment.
Validating this, Ashish Kumar Chauhan, MD & CEO, BSE, said, “The minor increase of STT on option premium from 0.017% to 0.05% is not expected to move the balance away from derivatives in India to the underlying equity market. Therefore, the current structure of the market should remain intact going forward.”
In the last six months, for which NSE has made data available, options premium turnover is slightly over Rs 1.71 lakh crore. If one assumes that a significant chunk of this is for options sold, as opposed to options exercised, the total STT collected by the government would roughly be just Rs 29 crore (0.017% of Rs 1.71 lakh crore). So, even with this three-fold hike, the government would be able to earn about Rs112 crore more (0.033% of Rs 3.42 lakh crore) per annum, which, some market experts feel is not an amount the government should at all risk drying up volumes for, particularly at a time when a significant chunk of volumes in the futures segment has migrated to Singapore to benefit from lower transaction costs and uncertainties over GAAR in India.