From the Ring. From the Ring

Taxing the capital markets

When one looks at India’s capital markets that buy and sell stock and debt instruments, a tax that grabs the attention of any potential investor or trader is the Securities Transaction Tax (STT). It was introduced in 2004 by the then Finance Minister P Chidambaram. The basic logic of this tax was to help avoid tax evasion, as it would require all trades to be taxed at their respective rates. Furthermore, it would allow the Government to raise significant amount of revenues. In 2013-2014, close to ₹6,000 crore was raised through STT alone.

Glaring issues However, there are some glaring issues with the STT rates. If one of the goals of the STT is to curb speculation, then it would seem obvious to keep STT rates for delivery trades at par or lower than intra-day trades on the equity segment. But, the current structure of 0.025 per cent STT for intra-day trades on a sell transaction and 0.1 per cent on buy and sell transaction for delivery-based trades seems to discourage delivery-based investments. With only 2 per cent of the country’s population participating in the capital markets, the STT structure is a major hindrance and completely counter intuitive for those who want to invest in the markets.

One major consequence of this is that market activity has shifted from equities to derivatives. While equity volumes have grown marginally over the past few years, futures and options turnover has picked up considerably. In 2012, the NSE averaged approximately ₹120,000 crore of daily turnover on the F&O segment. This jumped to ₹150,000 crore in 2013 and is now ₹160,000 crore in 2014, while the average turnover in equity is just ₹15,000 now.

There was some hope that the Finance Minister would lower the STT(or at least standardise them) during the Budget; however, no changes were introduced.

Other taxes Aside from the STT, there are other transaction costs that make investors think twice before putting money into the capital markets. Almost all firms in India charge a percentage of turnover done as brokerage. Based on the brokerage amount, there are taxes to be paid. For example, assume that a broker charges 10 paisa (that is, 0.1per cent) brokerage on delivery-based trades. If an investor wishes to buy 10,000 shares of a stock trading at ₹1,000 (that is, ₹1 crore in turnover), he will need to pay a staggering ₹10,000 on this single transaction, aside from ₹10,000 in STT on the buy side transaction (and another ₹10,000 on the eventual sell).

Additionally, he will need to pay stamp duty to the State government, which differs in each State. Maharashtra, for example, charges ₹1,000 per crore of turnover for delivery-based trades. Add in transaction/turnover fees that brokers charge, educational cess/SEBI fees/service tax, and you are talking about a lot of taxes that are bound to discourage investors from the capital markets. If we truly want to increase investor participation in the capital markets, it’s time to seriously consider revising the taxation structure.

(The writer is the Co-founder, RKSV)

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