The Hindu Business Line : Feeling the pinch of STT

While introducing the Securities Transaction Tax in the July 2004 Budget, the Finance Minister remarked that the new tax regime "will be a win-win situation for all concerned." He also remarked that the levy would be small. Opponents of the tax argued that the tax will not stay small and that it is not equitable. Investors who gain Rs 1 lakh will pay as much tax as investors who lose Rs 1 lakh.

The Finance Minister seems to be making the opponents' case stronger. This small tax has now grown to Rs 25 for a non-delivery based trade within two years from Rs 15. The increase in tax for non-delivery trades will certainly not threaten trading volumes. It will, however, surely add to the cost for traders. Suppose you profit from only one out of every two trades. Then the cost works out to 0.05 per cent and gain from the profitable trade has to be higher than this cost. Though this may sound small, it isn't. Average daily gains for Nifty from April 1 2003 till now are about 0.16 per cent. The build-up of costs would be even more significant if you profit from only one in every five trades. Thus, it does not seem to be a wonderful idea to keep jacking up the STT rates every year. The Finance Minister is treading a fine line on this issue and he seems to have given in to the demands of the Left in this case. It is, however, bound to invite opposition from the traders.

Incidence on delivery-based transactions has also increased. Purchase and sale of equity shares or mutual funds will now attract a levy of Rs 250 for a transaction of Rs 1 lakh in value. If you were a long-term investor, you would still certainly welcome STT, considering that the capital gains tax could otherwise have worked out to a far higher sum. The low STT allows long-term investors to demand lower returns from equities. This, in turn, should keep the long-term money flowing into the equity markets.

The Finance Minister, however, had very little in store for debt markets. He ushered in a unified exchange for Government securities market under the Negotiated Dealing System managed by the RBI.

Trading volumes in Government securities though have been declining. He also wants a single unified exchange for corporate bonds but did not make any announcements that wouldwill provide a fillip to trading of corporate bonds.