Finance Bill 2023: STT hike on F&O likely to make a dent in volumes

Sebi study for FY22 had shown that 9 out of 10 F&O traders had incurred losses

The surprise 25 per cent hike in securities transaction tax (STT) on sales of futures and options (F&O) contracts has met with a disapproval from the stock-broking community, who fear a hit on volumes, impact costs and profitability. 

The Ministry of Finance, correcting a typographical error in the amendments to The Finance Bill,2023 announced an increase in STT from the current rate of Rs 5,000 to Rs 6,250 per Rs 1 crore for sale of options. Further, for sale of futures in the securities, STT rate has been increased from 0.01 per cent to 0.0125 per cent, translating into Rs 1,250 per Rs 1 crore. 

These changes will be applicable from April 1, 2023.

Voicing out concerns and requesting for a review of the decisions, stock brokers said that the higher STT will increase the cost of transacting in the domestic markets, which is already high compared to global standards.

“The current rate of STT at Rs 5,000 per crore on sale of options itself is a very high and was required to be reviewed,” said Kamlesh Shah, president, Association of National Exchanges of Members of India (ANMI) — a brokers’ body.

“We are already paying the highest transaction charges and as it, the derivatives profits are taken as business income. We may face export of business to overseas exchanges. Large part of the volume is intraday and STT is a major component of the transaction charges. Volume in the cash market as well as derivatives will suffer,” he added.

For March 2023, the average daily turnover for derivatives on the National Stock Exchange (NSE) stood at Rs 237 trillion. In the 2022-23 financial year, on the year to date front, 99 per cent of F&O trading was on the options side, according to a report by CLSA. Overall F&O volumes have also surged more than 50x over the past 10 years to the tune of Rs 33,268 trillion for the eleven months of FY23.

“This may lead to higher impact costs. The trading volumes of high frequency traders (HFTs) will get impacted and they may be forced to tweak their strategies to adjust to the higher STT levy and impact cost. To be a price setter in the world markets, we need high volumes with a low impact cost,” said Narinder Wadhwa, president, CPAI.

Earlier, the Securities and Exchange Board of India (Sebi) had released a study showing the widespread losses by individual investors in the F&O segment. The study showed that 9 out of 10 traders incurred losses in FY22.

Stock brokers are of the opinion that the new changes will lead to further losses from retail investors as they will have to target more returns to compensate for the increased STT along with other fees like exchange charges, stamp duty, GST, brokerage, and the regulatory charges.

“By chance, if someone is profitable after all this, they pay the maximum income tax rate. We then wonder why many traders find it hard to be profitable. A robust and liquid stock market is cardinal to our economy; the small guy who is helping to make this happen should also be helped,” said Zerodha co-founder Nikhil Kamath.

Some are hopeful that the impact on volumes may only be felt in the shorter period.

“We may see some short term impact but we believe that the market will take a stride and adjust to it. The last time when it was increased 3x, from 0.017 per cent to 0.05 per cent, the market moved ahead and we saw a significant jump in the volumes in later years,” said Jimeet Modi, group chief executive officer, Samco.

Legal experts said that the government might have to bring an ordinance to correct the typographical error as the Lok Sabha has already passed the Finance Bill with amendments.