Overturning
Transaction Tax
By Kavaljit Singh
05August , 2004
Znet
Under
pressure from powerful lobby of brokers, speculators, arbitrageurs and
"noise traders," Finance Minister, P. Chidambaram, diluted
several important provisions of the proposed securities transaction
tax (STT). For a detailed analysis of the proposed STT, see Kavaljit
Singh, Equitable
Equity: India Introduces Securities Transaction Tax)
It is important
to note that Finance Minister has not only reduced the tax rates but
also offered differential tax rates for different market players. In
an announcement in the Parliament on July 21, 2004, he announced following
amendments in the proposed STT regime:
1. The 0.15 per
cent STT would only be applicable on delivery-based trade in equity.
2. The 0.15 per
cent STT on delivery-based trading would be equally split between the
buyer and the seller.
3. The STT rate
for day traders, arbitrageurs and "noise traders" has been
reduced to a meager 0.015 per cent. Further, they would be allowed to
take credit for the tax against business tax on profits.
4. The STT rate
for derivative traders has been reduced to 0.010 per cent and they too
would be allowed to take credit for the tax against business tax on
profits.
5. Trading in bonds,
including Government bonds, would be completely exempted from STT. In
the same vein, units of mutual funds (other than equity-oriented funds)
would also be exempted from STT.
Soon after amendments
in the proposed STT regime were announced, speculators and day traders
got active in the markets and as a result the stock indexes witnessed
a massive surge within few minutes. The reason being that such a massive
dilution of tax regime was way beyond the expectations of day-traders,
speculators and other market players. By diluting several provisions
of the proposed STT regime, Finance Minister has not only bowed to pressure
from this powerful lobby but also given a clear signal that the new
government is fully subservient to the private interests of speculators
and day traders. No wonder, Finance Minister, who was hounded for introducing
the STT, became the darling of such market players soon after the announcement.
The major gainers
of the revised STT proposals are speculators, day traders, brokers,
arbitrageurs and derivative traders who indulge in large-scale speculative
activity in the financial markets. Such a preferential tax treatment
to this community has legitimized their undesirable speculative activities
in the Indian financial markets.
What is distressing
is that genuine investors who carry out delivery-based transactions
have been penalized with higher taxation. Instead of taming speculative
activities in the financial markets which diverts large amounts of resources
away from productive purposes, genuine investors have been penalized.
No explanation has been given for unfair treatment to genuine investors.
It is a well-established
fact that the depth of financial markets is determined by the number
of genuine investors (not speculators) it is able to attract. It is
the genuine investors (not speculators) who are the life and blood of
the financial markets. Particularly in the case of India where deliveries
are less than 20 per cent of trading volume, higher taxation on delivery-based
transactions would act as a disincentive for genuine investors. By doing
so, Finance Minister has offered unfair disadvantage to genuine investors.
India is perhaps the only country in the world that punishes genuine
investors by imposing higher tax rates.
One of the biggest
losers of the proposed amendments would be the government itself, as
there would a revenue loss of at least Rs.25000 million. No one knows
how the government would fill this revenue loss.
What is even more
distressing is that Finance Minister has not shown similar flexibility
on his controversial proposal to increase the limits of foreign direct
investment on insurance, telecommunications and civil aviation sectors.
The proposed hike in foreign investment in these sectors is strongly
opposed by the left political parties, which are supporting the Congress-led
United Progressive Alliance (UPA) government. It appears that Finance
Minister is more submissive to the private interests of speculators
rather than its political allies.
With the proposed
amendments, Finance Minister has lost a golden opportunity to curb excessive
speculation in the Indian financial markets. Now it is very clear that
the STT is not meant to curb excessive speculation or raise revenues.