Tax Sops to Give a Fillip to Delivery-based Trades

STT cut, Rajiv Gandhi Scheme will encourage genuine investors and hit speculators

The proposed 20% cut in Securities Transaction Tax (STT) on deliverybased cash transactions and the introduction of Rajiv Gandhi Equity Savings Scheme are expected to push delivery-based volumes on the bourses over a period of time. These tax benefits will eventually lead to an improvement in participation of the existing as well as new investors in the stock market, with some shift in preference from day trading and speculation to investment activity, according to brokers. 

"It seems the government wants to encourage investment activity while discouraging excessive speculation in the market," said Kisan Choksey, chairman, KR Choksey Shares and Securities. The proposed STT reduction and the new tax saving investment scheme will be in the interest of smaller investors who have been shying away from the market for the past many years, he feels. 
Over the past one year, there has been a substantial decline in delivery-based volumes, partly due to lacklustre participation of retail investors in trading. From a daily average of 51.7% in March, 2011, delivery ratio —which is the percentage of shares actually changing hands in relation to total traded quantity—declined to 44.1% in the cash segment of the BSE in March 2012. 
The market is waiting for more clarity on the Rajiv Gandhi Equity Savings Scheme under which new investors, whose annual income is below . 10 lakh, will be allowed deduction from taxable income of 50% on investment of up to . 50,000 directly in equities. The scheme will have a lock-in period of three years. 
"The tax benefit under the new scheme could be higher than other similar equity schemes available to investors, which will help drive retail participation and push up delivery-based trading in the future," said Sunil Maheshwari, an investor from Amalner, a small town in Maharashtra's Jalgaon district. 
Maheshwari, however, said it will take some time before smaller players make a strong comeback to the bourses, which also depends on economic and political developments in the country. 
"We were expecting the government to reduce STT by half across all the categories of stock-market transactions. Nevertheless, a 20% cut in cash deliveries is a positive attempt towards encouraging investment and discouraging speculation in the market," said Siddharth Shah, chairman, BSE Brokers' Forum, a body of members registered with the BSE. 
In his Budget for 2012-13, finance minister Pranab Mukherjee announced a relaxation in the STT rates from the existing 0.125% on delivery-based turnover in the cash market, to 0.10%. At the new rate, STT of . 10,000 will be charged on every . 1 crore of turnover in the cash market. The rates for other transactions, including non-deliverybased equity, mutual funds, futures and options – are kept unchanged. 
The proposed reduction in STT will marginally bring down transaction costs for investors. At present, the cost of deliverybased cash market transaction worth . 1 crore includes STT of . 12,500, stamp duty of . 1,000, Sebi fees of . 10, exchange charges ranging from . 225 to . 350 and a 10.3% service tax on exchange charges, both on purchases and sales.