Financial Daily from THE HINDU group of publications
Wednesday, Jul 14, 2004
Financial Daily from THE HINDU group of publications Wednesday, Jul 14, 2004 |
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Markets
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Taxation Transaction tax, a knock on financial markets: IMF study Jayanta Mallick
Kolkata , July 13 A RECENT study by two International Monetary Fund (IMF) experts has concluded that tax on securities transaction or its equivalent "throws sand, not in the wheels, but into the engine of financial markets". Mr Karl Habermeier, an advisor in Monetary and Exchange Affairs Department, and Mr Andrei Kirilenko, an economist in the International Capital Markets Department of IMF, assert that a transaction tax could have negative effects on price discovery, volatility and liquidity, and lead to a reduction in the "informational efficiency" of markets. They further argued that securities transaction tax (STT) alters the transformation of latent demands of investors into realised trades. Experience suggests that STT obstructed investors to carry out their desired transaction; thus the potential demand is not translated into action and resources are not put to their best use. It also induced higher transaction cost and increased volatility. The study has pointed out that experience showed that STT caused migration of volumes to other markets or instruments and distorted the informational efficiency of a market or instruments on which it was imposed. In markets other than in North America, the study found that higher trading costs, some of which were due to STT, were related to increased volatility and lower volume. Another point raised, using a mathematical model, was that "a uniform transaction tax is not payoff-neutral. The tax rates must depend on the `delta' of the replicating portfolio." The study also threw light on the role of traders, who were normally hit by STT in a capital market. It says traders manage risks and provide liquidity. "If trading becomes costly, as a result of transaction taxes, dealers cannot manage their risks effectively. Accordingly, they become less willing to put their own capital at risk in order to provide liquidity". Another study by the Canadian market economists found that many countries abolished STT, as they found it to be a disappointing revenue source with wide ranging side effects. In many countries, introduction of STT forced the volume and prices to decline. In Sweden, for example, the day STT was announced, share prices fell by 2.2 per cent. But there, it was leakage of information prior to the announcement, which might explain the 5.35 per cent decline in 30 days prior to the announcement. Interestingly, in India, though there were prior indications that STT may be introduced, the prices did not decline. It fetched negative reaction after the announcement. The Canadian study also argued that the "low rate of STT is likely to produce negative results, albeit of small magnitude." The STT of 15 basis points proposed by the Finance Minister, Mr P Chidambaram, is among the lowest that had been tried in other countries. An exhaustive study on the effects of STT on the Japanese market by Prof Kioyuki Ono of Toyo University and Prof Minoru Hayashida of the Kitakyushu University said that STT-induced transaction costs hike affected volumes, though relatively smaller than that in the European markets.
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