STT may be Cut to Fire up Mkt

Abolition of transaction tax could cost govt . 7,500 crore a year The capital markets division of the finance ministry has mooted a proposal to abolish or substantially dilute the securities transaction tax (STT), a levy that fetches the government around . 7,500 crore a year but is disliked by investors as it adds to the cost of buying and selling shares in the country.  A senior official in the capital markets division said this proposal along with other measures such as reducing stamp duty is being discussed with the revenue department. The BSE Sensex recovered from an intra-day low of 15801 to close down only 111 points at 16051 on strong recovery in the European markets and the government's STT proposal. The revenue department had in 2009-10 rejected a similar proposal to remove STT and even if there is agreement this time, any change in the regime will have to wait till the next budget is presented in February 2012.  The STT was introduced in the 2004 budget by then finance minister P Chidambaram and over the years, the rate of this transaction tax has come down from 0.15% levied initially. Currently, a 0.125% tax is levied on both buyers and sellers in case of delivery-based trades. In the case of day trades, the levy is 0.025% on the seller only. Investors, Stock Exchanges Want the Tax Removed  The removal of this tax is a long-standing demand of investors and stock exchanges who argue that a multiplicity of levies such as stamp duty, service tax, exchange turnover fees, Sebi charges, in addition to STT itself, make India one of the most expensive markets as far as transactions costs are concerned. "Removal of STT or cut in rates will lower transaction cost substantially and benefit short-term traders, hedgers, arbitrageurs and intraday traders and boost overall market sentiment," says Motilal Oswal Financial Services CMD Motilal Oswal.  According to Praveen Malik, vice-president in charge of compliance at Centrum Broking, the removal of STT would certainly help in attracting more volumes. The capital markets division had pitched for complete abolition of the tax ahead of the 2009-10 budget, but the revenue department prevailed as it wanted the STT phaseout to be timed with the rollout of the Direct Tax Code. The code was to unveil a new method of taxing capital gains on securities. However, the DTC Bill finally introduced in Parliament does not propose any change in the capital gains tax regime and it remains to be seen whether the revenue department will now agree to remove STT  The revenue department has also in the past been keen on STT as it allows it to collect tax on sale of securities from FIIs routing their investment through Mauritius, thereby enabling it to trace a trail back to offshore tax havens. On stamp duty, the department of revenue has agreed a single countrywide rate of 0.003 % from a high of 0.005% in some states for most securities transactions, both, in the futures and cash segments. For currency derivatives, the Department of Economic Affairs is pushing for reduction to 0.0001% to boost trade in this segment. Finance minister Pranab Mukherjee will take a final call on the rates before the stamp duty amendment bill is taken up by the cabinet. The reduction in rates on financial transactions is a part of the exercise to overhaul the 150-year old act and any change in rates will have to be agreed upon by the states.