STT and stamp duty reduction will improve liquidity

STT and stamp duty reduction will improve liquidity

According to newspaper reports, the finance ministry is considering a reduction in the rate of the securities transaction tax (STT) as well as a uniform stamp duty structure across the country. Most market experts say transaction taxes cause inefficiencies in the market and are best done away with. A move to reduce these taxes, therefore, is a step in the right direction.

Consider the current high rates at which these taxes are levied. In the futures market, the National Stock Exchange levies a transaction fee of 175 for every 1 crore worth of trading, for both buy and sell transactions. STT is applicable only on sell transactions, but at a much higher rate of 1,700 for every short position of 1 crore. Stamp duty in Maharashtra for equity futures transactions was raised earlier this year from 200 for every 1 crore worth of trading to 500. In other words, for every round trip or squared-off transaction worth 1 crore, STT and stamp duty added up to 2,700, nearly eight times the fee levied by the stock exchange.

What’s more, given the higher rate of stamp duty in some cities such as Mumbai and Delhi, many brokers with arbitrage desks and short-term trading strategies have had to relocate operations to other cities. This causes an unnecessary disruption in the marketplace.

Given this backdrop, it’s little wonder that traders have shifted en masse to products such as equity options, currency futures and commodity futures, where transaction taxes are either not charged or charged at a much lower rate. These segments, where transaction taxes are either nil or negligible, account for about 85% of the exchange-traded derivatives market. Needless to say, equity futures and the equity cash market were disadvantaged.

While the move to remove this discrepancy is welcome, it’s naïve to come to the conclusion that this will improve market sentiment. Lower transaction taxes will help short-term traders, arbitrageurs and proprietary desks that engage in a large amount of transactions. This will improve the liquidity in the market and help remove price inefficiencies. But it’s foolhardy to assume that market participants will take net long positions because of lower transaction taxes. Those decisions will continue to be governed by what is happening elsewhere in the world—especially in the euro zone.

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