In their pre-Budget consultations, capital market honchos on Tuesday urged Finance Minister Nirmala Sitharaman to reduce the securities transaction tax (STT) rate for cash market transactions, while hiking the STT rate for futures and options.

Such an approach will encourage people to invest more than engage in speculation (derivative trades of options and futures are seen to be speculative), they said in the pre-Budget talks that Sitharaman held virtually with the top honchos of the financial sector.

Nearly twenty honchos from financial sector attended the meeting including SS Mundra, Chairman, Bombay Stock Exchange; Kaushik Shaparia, CEO, Deutsche Bank India; Nilesh Shah, Managing Director, Kotak Mahindra Asset Management, and Navneet Muhnot, MD& CEO, HDFC Asset Management Company Ltd.

Introduced in 2004, STT is levied on stocks, stock derivatives and equity mutual funds at the time of purchase and sale. In Budget 2022-23, Sitharaman had pegged the Budget Estimate for STT at ₹ 20,000 crore, which was 60 per cent higher than the previous year’s BE.

Currently, on cash market trades, a STT rate of 0.100 per cent is imposed, while the rate is 0.010 per cent on futures and 0.05 per cent (on option premium) for sale of an option in securities.

TAXATION ISSUES

A substantial part of the submissions of the financial sector at today’s pre-Budget meeting centred around ‘taxation’ issues. Mutual funds, insurance and Alternative Investment Fund (AIF) industry representatives sought fair treatment on taxation front. 

AIFs operate on a tax pass-through basis for income and losses, but not for expenses. This distorts the returns from AIFs as the historic expenses become a dead loss in the hands of investors, leading to negative drag on returns.

AIFs, at the pre-Budget meeting, wanted a tax pass of expenses to make them more globally competitive. Tax pass through status has only been afforded for CAT I and II AIFs and not CAT III AIFs (hedge funds and listed market funds). “This is pushing fund managers to set up in Singapore or Mauritius as opposed to GIFT IFSC or India. The gateway to Indian equities should be Mumbai, not Mauritius”, Siddharth Pai, Founding Partner, 3one4 Capital and Co-Chair of the Regulatory Affairs Committee at IVCA, told businessline after the pre-Budget meeting.

On their part, mutual fund industry and insurance sector representatives called for parity with National Pension System (NPS) on taxation front, especially on contributions. NPS is running on a much more beneficial tax system of EEE (exempt-exempt-exempt) for contributions, accumulations and withdrawals.

NBFC CONCERNS

Raman Aggarwal, Director, Finance Industry Development Council (FIDC), a representative body of asset and loan financing NBFCs, said that he urged the Finance Minister to exempt NBFCs from TDS deduction (u/s 194) by borrowers to ensure harmonisation and also to remove the ambiguity in co-lending. There should be no TDS when borrower pays interest to NBFCs including in co-lending arrangements.

A case was also made to bring NBFCs on par with housing finance companies, banks, small finance banks and other financial institutions on the use of SARFAESI as a tool for recovery. Banks can use SARFAESI for loans as low as ₹1 lakh and above, while NBFCs can use it only for loans above ₹20 lakh. So the demand today was to reduce threshold for NBFCs to ₹1 lakh from ₹20 lakh.

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