The Federation of Indian Chambers of Commerce and Industry (Ficci) and The Associated Chambers of Commerce and Industry of India (Assocham) have both urged the government to abolish the Securities Transaction Tax (STT), to attract wider participation from small and medium size traders.
In a pre-Budget memorandum to the finance minister, Ficci argued, “The government should abolish the tax on gains from listed securities, whether in the nature of capital gains or business income, which shall incentivise investors to have more participation in the capital markets.” The Shome committee report on General Anti-Avoidance Rules had recommended abolishing the tax on gains from transfer of listed securities, whether in the nature of capital gains or business income, to both residents and non-residents. However, it had also said the government must consider increasing the rate of STT appropriately.
Opposing the Shome report, Ficci said, “Increasing the transaction cost will reduce the liquidity from the system and, hence, the government should consider reducing the same.”
According to the National Stock Exchange, this country is one of the costliest destinations to trade. STT, along with other taxes, and a high brokerage structure make trading in India five-six times costlier than in advanced countries.
Similarly, Assocham said, “Both buyers and sellers of securities have currently to pay this tax. Hence, a higher STT hits trading volume. It drains liquidity by raising the impact cost for day traders.”
In fact, STT collections dipped 12.9 per cent during April–November 2012 due to a dip in trading volumes. The income tax department collected Rs 2,905 crore in STT during this period, compared with Rs 3,335 crore during the corresponding period last year.
If STT is abolished, said Assocham, it would reduce transaction cost, promote an equity culture and encourage retail participation, all of which would boost volumes. Removal of STT will be a major attraction for further FII inflows, and can boost the markets. India is experiencing one of the highest transaction charges in the world, a major hurdle for attracting global money, it added. There is also talk of an STT on commodity futures, the Commodities Transaction Tax. Commodity exchanges have pleaded with the finance minister not to introduce CTT at a time when investment and trade sentiment are not favourable and the government has been making consistent efforts to get investments back on track. Data from the Forward Markets Commission showed a 5.5 per cent decline in commodities futures turnover in April–December 2012.
Levying a CTT would drive away commodity volumes from India to other destinations such as Singapore, Dubai, London and New York, said the executives of five national commodity exchanges recently.