Maharashtra stamp duty move spooks markets

State Budget proposes to double levy, brokers say arbitrageurs, day traders may have to shut shop.

The cost of trading shares is set to rise for many. The government of Maharashtra — which accounts for 40 per cent equity volumes on the country’s two biggest exchanges — has doubled the stamp duty on equity transactions.

To simplify the process of collecting the duty, state Finance Minister Ajit Pawar, while presenting the annual Budget on Wednesday, proposed a uniform duty of 0.005 per cent on all equity transactions.

The current average is 0.0024 per cent in the cash segment and 0.002 per cent in the derivatives segment.

Market players say this may impact market depth. They also fear that other states may follow.

“The proposal will hamper liquidity, as jobbers and day traders will run out of business. While they will shift their trading desks out of the state, there is no guarantee that other states will not follow Maharashtra. The only option for brokers is to challenge the new rate in a court, as its applicability in certain areas is mindless,” said Anil Bagri, the president of the Association of NSE Members of India. Bagri says the levy will make the arbitrage business unviable.

“Already, arbitrageurs and jobbers are shutting shop. Ultimately, the cost will be passed on to clients or customers of brokers,” he said.

“The government is showing its indifferent attitude towards the industry. The volumes will fall. This will also affect financial inclusion. Already, statutory costs for equity trading are the highest in India. States like Maharashtra are increasing taxes but there seems to be no curtailment of costs,” said Deven Choksey, the managing director of Mumbai-based K R Choksey Shares and Securities.

On an average, equity worth Rs 1,80,000-2,00,000 crore is traded on the National Stock Exchange and the Bombay Stock Exchange every day. Maharashtra is the largest contributor, followed by Gujarat, Delhi and Rajasthan. Close to 80 per cent volumes are generated by intra-day traders.

In the cash segment, the average stamp duty is Rs 240 on every Rs 1 crore trade, both intra-day and delivery-based. In futures and options, it is Rs 200 on every Rs 1 crore trade.

The weightage average comes to Rs 240 per Rs one crore trade.

Rough estimates suggest that Maharashtra collects Rs 40-50 crore as stamp duty from stock markets every year.

While the cost of trading equity, including brokerage, in the US and Europe is around Rs 500 on trades worth Rs one crore, it is as high as Rs 1,300 in India. This includes Rs 850 securities transaction tax. While Rs 200 goes to the exchange, Rs 200 is paid as stamp duty and Rs 21 as service tax. Also, Rs 10 is collected by the Securities and Exchange Board of India. In addition, there is a brokerage. If trades are delivery-based, they attract depository and demat charges as well.

While it may seem minuscule in percentage terms, it is a major burden, as traders can make profit in India only after 28 ticks, while in the US and the UK, just one favourable tick on index futures can generate a profit for traders. In the US, the spread on the S&P contract, or one tick, is 25 cents. So, if a trader gets just one tick right, he can take home 20 cents, as the trading cost there is just five cents. This is the reason why the US the markets are more liquid.

The move has come at a time stock brokers are discussing a uniform and cheaper cost structure with the central government.