Budget 2020: Why commodities trading in India costs you a fortune; here’s how country fares globally

Updated: January 29, 2020 1:14:28 PM

Budget 2020 India: 88E restoration will not only improve market volumes but also boost STT collections; so it’s a bit strange why Finance Ministry has not restored it yet.

Budget 2020, Union Budget 2020 India, Budget 2020 India, Budget 2020-21, CTT, STT, trade, sensex, nifty, share market, market expectationBudget 2020-21: The cost of executing a transaction in India in various asset classes is 4 to 19 times the cost of executing a comparable transaction in the U.S., China, and Singapore.
  • Narinder Wadhwa

Union Budget 2020 India: Due to the high incidence of Securities Transaction Tax (STT) and Commodities Transaction Tax (CTT), the cost of executing a transaction in India in various asset classes is 4 to 19 times the cost of executing a comparable transaction in the U.S., China, and Singapore. The DEA standing council observed that reforms policy also needs to reduce the costs arising due to tax policy issues in order to improve the competitiveness of Indian commodities derivatives.

Out of the total cost of INR 17,284, INR 11,959 goes to the government and if one adds impact cost due to STT, it will go up further. No industry in particular with such a high share of government levies will be able to grow.
Cost in India is significantly higher than trading similar instruments globally leading to poor volumes, low liquidity and high impact cost in India.

RBI wants corporates to hedge commodity risk but in this case, CT is a road barrier. The governments want exchanges to be as vibrant as those in the US, UK, and Singapore but again STT is friction which is preventing growth. STT was levied in lieu of zero long term gain tax and concessional short term tax. However, people assessed under business income always paid full tax at slab rates and got no such concession.

Hence, right from the inception of STT in 2004, for business assessees, the STT paid by them was treated as tax paid towards their normal slab tax liabilities on trading income u/s 88E and they had to pay the balance tax.  However, in 2008, SEBI noticed that a small section of members and clients undertook voluminous client code modifications and hence with effect from 1 April 2008, 88E was withdrawn. This led to huge double taxation to the tune of 65-85% as people first paid STT irrespective of profit and loss and then income tax.

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However, by strict action, stringent conditions and penalties, SEBI has already resolved the code modification matter by 2012 and it is no longer relevant. However, it seems SEBI has not apprised North Block about this and the consequent fall in market volumes, as 88E is yet to be restored.  Ironically, 88E restoration will not only improve market volumes but also boost STT collections; so it’s a bit strange why Fin Min has not restored it yet.

In modern economic theory, taxes should be either on income or on value-addition and turnover based taxes are regressive and hamper market development. But on the other hand, STT has zero leakage and zero cost of collection.
By continuing STT, CTT on turnover but at least applying it towards direct “income” tax liabilities, the Govt can have the best of both worlds that is higher collection of STT, CTT at zero cost of collection and zero leakage and simultaneously not hampering the market growth. 88E is the only way by which the government can have its cake and eat it too.

Narinder Wadhwa is President of Commodities Participants Association of India (CPAI) and CMD Ski group. Views expressed are the author’s personal. 

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