STT abolition to bring back high volumes

The Securities Transaction Tax (STT), a bugbear for the market ever since its introduction in 2005, will be abolished, according to the draft Direct Taxes Code, and market players felt this would bring back high volumes in the market.

However, investors will have to pay capital gains tax on profits earned by them on investments regardless of the length of time for which they are held. In other words, there is no distinction between short-term and long-term, though the gains realised after one year will be eligible for indexation benefits.

“The rate of capital gains tax will be fixed as per the income slab of an individual investor. At the top end, it could be as high as 30 per cent,” said Sanjay Kapadia (taxation practice), PricewaterhouseCoopers. However, the indexation benefits should soften the blow somewhat. The code notes: “In the case of a capital asset which is transferred anytime, after one year from the end of the financial year in which is acquired, the cost of acquisition and the cost of improvement will be adjusted on the basis of cost inflation index to reduce inflationary gains.”

Currently, only short-term investments of less than a year attract capital gains tax at the rate of 31 per cent. Currently, indexation benefits are available for debt funds. The long-term capital gains on equity funds is zero. Also, dividends paid out on equity funds are fully tax-exempt and there is no dividend distribution tax, or DDT.

Market participants have welcomed the proposed abolition of the STT. Nilesh Shah, deputy managing director, ICICI Prudential AMC said: “The removal of the STT will reduce the cost of transactions and therefore, create more arbitrage opportunities. Moreover, daily transactions are good since they will increase the depth of the market.”

Some others said the STT abolition would be beneficial for brokers and day-traders, for whom the cost of transactions had increased considerably. And this will bring back high volumes in the market.

The market is expected to react positively to this when it opens tomorrow. The SGX CNX Nifty Index Futures (August series) were trading at 4,532 at around 8 pm on the Singapore Exchange. The August futures had closed at 4,460 on the National Stock Exchange and 4,472 on the Singapore Exchange. The volumes on the OTC counter in August futures were considerably higher at 1,066 contracts of $2 each, compared to average daily volume of around 25-50 contracts.

Indian GDRs and ADRs were also trading considerably higher compared to their closing on the local market. The ADR of technology giant, Infosys Technologies, was higher by 1.15 per cent, while the ADR of ICICI Bank was up 3.10 per cent. The GDR of Grasim was up 3.75 per cent, while that of Ranbaxy Labs was up 3.38 per cent.