Although the market has been demanding a complete withdrawal of the Securities Transaction Tax (STT) and the Commodities Transaction Tax (CTT), the government may initially settle for their removal only on delivery-based trades, a senior government official hinted.
At least two regulators — the Securities & Exchange Board of India and the Forwards Markets Commission — have also sought removal or rationalisation of these taxes.
"Indian securities markets are being exported outside of the country and this is largely due to high transaction costs....There is a need to relook at these if the country is keen to become an attractive financial centre," the official said on condition of anonymity. However, given the country's high fiscal deficit, the government will consider the revenue implications of the proposal before taking a call.
STT earns nearly Rs 6,000 crore revenue a year. The tax was introduced by the then finance minister P Chidambaram. In lieu, the long-term capital gains tax was abolished and the tax on short-term gains lowered.
Market participants and commodity exchanges have pointed out that these taxes were coming in the way of markets gaining depths as as they increase transactions cost, which reduces market participation and lowers liquidity.
In case of stocks, STT is levied at the rate of 0.1% on both the seller and the buyer. On derivatives, the tax ranges from 0.01% to 0.125% and is levied on the seller only.
Sebi has demanded removal of STT on at least one leg of transaction, stock purchases, as also CTT on delivery-based transactions. FMC has also asked the government to remove CTT on such transactions besides on some processed foods such as coffee and guar gum.
"Transaction taxes hurt volumes....World over, the trend has been to reduce transactions costs for market participants," the official quoted earlier said.
CTT is levied at the rate of 0.01% of the transaction value on the seller for trading in all non-agricultural commodities such as gold, silver, crude, zinc, copper and aluminium.
A high-level expert panel headed by senior economic advisor in the finance ministry D S Kolamkar has pitched for allowing banks, financial institutions and foreign firms participate in commodity futures trading to deepen domestic markets.
Exchanges should explore new ideas in contract design, to more tightly define the product with a narrower set of grades and locations, so as to reduce the frictions of arbitrage and, thereby, improve hedging effectiveness wherever the movement of prices of the commodities across grades and locations are not aligned, the panel had said.
Exchanges should explore new ideas in contract design, to more tightly define the product with a narrower set of grades and locations, so as to reduce the frictions of arbitrage and, thereby, improve hedging effectiveness wherever the movement of prices of the commodities across grades and locations are not aligned, the panel had said.
"Commodities markets need a whole set of reforms as also reduction in transaction costs,"
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