The Hindu Business Line : Trransaction tax — Stockbrokers fear shift in business, slump in volume

WITH the Finance Minister, Mr P. Chidambaram, virtually making it clear on Monday that there will be no going back on the proposal to levy transaction tax on the trading in the capital markets, the attention now is on whether part of the levy would be shifted to the short-term capital gains tax, in case he decides to reduce the proposed tax from 0.15 per cent announced during his Budget speech, to cushion the impact on jobbers.

But the market players expect that the focus of the capital market would shift from short-term players/day traders to long-term investors, which they feel would lead to a sharp drop in the trading volume.

What is surprising is that unlike on the Budget day, when the Sensex tanked sharply after the Finance Minister indicated the levy of transaction tax, the market did not seem to panic so much on Monday even after the Minister virtually made it clear that there would be no rollback of the tax proposal.

Mr Chidambram, while speaking at a meeting organised by FICCI in New Delhi, referring to the transaction tax, described it as an efficient and non-discriminatory tax that would help reduce tax avoidance. While expressing his willingness to consider any alternative proposal, he made it quite clear that the tax would stay.

Speaking to Business Line, Mr Jose C. Abraham, Managing Director, Fortune Wealth Management Company India (P) Ltd, Coimbatore, said the levy might not lead to a prolonged bearishness in the market. But it would result in a shift in trading in the stock markets - from short-term trading to long-term investment with quite a catastrophic consequence.

He said many of the big-ticket operators indulged in a large volume of trading because of the thin spread available. If they were to continue to do business in the transaction tax regime as they were doing earlier, they would be required to make a substantial profit to stay afloat after paying the tax, which was not just possible. He said the 40-odd share broking offices in Coimbatore accounted for a trading volume of around Rs 100 crore per day. He feared that if the transaction tax were levied as planned, the volume would drop to less than Rs 10 crore a day. This would put the jobbing brokers out of job. Any substantial fall in volume would hurt small investors and it may also influence the decision of FIIs to invest in Indian market.

Mr Abraham said it would be better if the Government chose the option of realising lower tax income, by taxing only delivery-based trading, rather than taxing every transaction that would lead to a drastic fall in trading leading to lower tax revenue. He said it was not true that all day traders make huge profit. Nearly 90 per cent of such traders make losses over a period of time, and this was so the world over.

The F and O segment also would become unviable. Such a move would only benefit the FIIs at the expense of short-term Indian traders who provided a much-needed liquidity to the stock market. He felt that the assumption of a tax collection of Rs 8,000 crore was not sustainable and a viable level of tax collection was just about Rs 500 crore per year.

Answering a question as to whether the market's behaviour on Monday did not belie the brokers' fears, he said more than any sharp decline in share prices the proposal would result in a steep fall in trading volume. He said he was not opposing the levy per se. But it should be reduced substantially and if possible made applicable only to delivery-based trading.

Mr K. Annamalai, former President, Coimbatore Stock Exchange and Director of Mumbai-based DJS Stock and Shares Ltd, conceded that the new levy is much less than the existing long-term or short-term capital gains tax. But a crucial difference is being made now. While at present only the actual capital gains is taxed, the proposed tax is levied for every purchase made, irrespective of the fact whether the purchase ends up in profit or loss.

He did not agree with the view that the new tax would provide stability to the market and would benefit the long-term investors.

He said out of the daily trading volume in the exchanges, only around 15 per cent was delivery-based.

There were a lot of external reasons that have a bearing on how the markets behaved and cost of operations was not an over-riding factor that decides market stability.

The world economy was also getting integrated and factors like oil price hike or interest rate fluctuations overseas also impact the Indian markets.

Mr Annamalai, replying to a question, conceded that a lot of day traders did not pay any tax even if they made profit from trading.

But these traders provided substantial liquidity to the market and if they curtailed their operations because of the transaction tax which they would have to pay every time they purchased shares, then it may lead to liquidity problem with sellers finding it difficult to locate buyers.

He suggested that the transaction tax should be made applicable only for delivery-based trading.