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K.S. Badri Narayanan

THE Budget proposals to introduce a turnover tax on transactions is a blow to the traders in the futures and options market as the costs will rise sharply.

This could lead to a decline in speculative interest, at least, in the near term. Traders in the derivative segment would have the bear the additional burden as the nature of the trade itself is short-term.

Consider the cost a trader has to bear now:

For buying Nifty futures at 1550 points: The total value of the contract is Rs 3,10,000 (1550 * 200. which is the market lot); a 0.15 per cent turnover tax on that works out Rs 465; brokerage at .05 per cent would be Rs 155; a service tax of 10 per cent on brokerage works out another Rs 15.5. A trader also has to incur Rs 2 on stamp duty and another Rs 1.50 (1 per cent SEBI tax on brokerage). The total transaction cost works out to Rs 639.

For buying Nifty options at 1550 strike (On Friday Nifty 1550 calls closed at premium of Rs 40.60): The total value of the contract is Rs 3,18,000 (1550+40 (premium) * 200 (market lot); turnover tax (0.15 per cent) costs Rs 477; brokerage at .05 per cent works out to Rs 159; 10 per cent service tax on brokerage flings another Rs 15.90; Besides, Rs 2 towards stamp duty and Rs 1.6 on SEBI tax take the total transaction cost to Rs 655.50.

Though the turnover tax is only on the buy side, the other costs are applicable for both buy and sell side. Also, the brokerage varies from between 0.05 per cent and 0.20 per cent and the stamp duty differs from state to state. One also has to foot other expenses such as demat, cost of margin money and the recently imposed 2 per cent cess on tax. A trader who engages in short-term trading activity on the cash market pays 10 per cent tax. But he has to fork out 33 per cent in futures market. (If an investor chooses to buy shares for a month (short-term) gain, he pays 10 per cent)

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