Forget a levy on commodity deals, the Finance Minister should do away with securities transaction tax itself.
The Budget for 2013-14 is probably all sewn up and the documents are being printed right now. Yet, that has not prevented various interest groups from lobbying with the Finance Minister for their respective proposals even at this late stage. Commodities exchange traders and their brethren from the stock markets have locked horns on whether a Commodities Transaction Tax (CTT), on the lines of the Securities Transaction Tax (STT), is desirable or not.
Stock market operators, brokers and officials want the STT withdrawn as they feel it is an unfair levy. They also point out that there is no transaction tax on commodities trading and therefore, the playing field is not level between them. Either withdraw the STT or impose a transaction tax on commodities as well, they say.
The commodities market players and exchanges are seeing red at this suggestion that they be slapped with the CTT. They managed to have the CTT, which was first imposed on them in 2008, withdrawn within a year and without it being implemented. Their arguments against the tax now are familiar. Those playing the stock market have the benefit of setting off their losses from derivatives transactions against their business income under Section 43 (5) of the Income Tax Act. This is because profit/loss from derivatives trading is treated as business income.
However, commodities traders don’t enjoy this benefit. Income from commodities trading is treated as speculative income and taxed under a different section of the Income Tax Act where the tax is higher. Besides, commodities players point out that after imposition of the STT, long-term capital gains tax has been brought down to zero. So, how can stock market players claim that the playing field is not level, is their refrain.
Out in the open
The battle between the two groups is so heated that industry association ASSOCHAM took out full page advertisements in newspapers last week arguing against the imposition of CTT and pointing out inconsistencies in the data and arguments of the ‘other side’. And yes, there is so much spin being put on the arguments by both sides that it would put Shane Warne to shame!
The truth of the matter though is that given the yawning hole in government finances, it must be tempting for Finance Minister P. Chidambaram to consider imposing CTT. The numbers look juicy indeed. Average daily turnover from commodity trading as per latest available data is Rs.55,781 crore, according to ASSOCHAM. This is more than double the value that was recorded three years ago. The business is clearly catching on and Big Brother can certainly do with a slice of the pie.
The commodity trading segment helpfully has pointed out to Mr. Chidambaram that if rising turnover were the criterion then other derivatives segments such as currency trading and interest rate futures also need to be taxed. The danger from this suggestion is that the finance minister could say “more the merrier” and tax all of them.
An unfair tax
But will that be a good thing to do? Not necessarily. Though transaction tax was first mooted by depression economist John Maynard Keynes and several countries have a financial transaction tax in their statutes, the fact is that it is not an equitable tax. By its very nature, tax should be collected only on profits or gains from business activity. Transaction tax though, as the name suggests, is imposed on the transaction value irrespective of whether such transaction results in profit or loss. So, if you sell a share in the stock market and incur a loss, you still have to part with a portion of the proceeds of the sale to the government. It is small comfort that you can set off your losses against business income and don’t have to pay long-term capital gains tax.
Most retail investors are salaried and don’t have business income which means that the set-off provision is useless. Similarly, it is rare these days for investors to hold their shares for the long-term as people churn their portfolios and also park short-term surpluses with mutual funds and in selected safe stocks. So the capital gains exemption is also useless. It is not surprising, therefore, that stock market trading data reveal that retail investors are exiting. In a time of dour market sentiment, having to pay a transaction tax certainly does not help. Again, day-traders and jobbers, who play the critical role of market-makers, operate on wafer-thin price spreads which are rendered unattractive by the STT.
No justification
So, instead of succumbing to the temptation of an additional revenue stream from CTT, the Finance Minister would do well to do away with STT itself. Especially if he desires to see the retail investors and household savings back in the financial markets. Data on STT collections in the last few years also don’t justify its continuation in the statute books.
The highest collections from STT — Rs.8,071 crore —were in 2007-08 and that was when the market was on a bull run. In the last three years though, collections have been declining. So, a simple cost-benefit analysis should lead to the conclusion that the STT has to go. The Finance Minister could consider re-introducing long-term capital gains tax instead.
If the arithmetic doesn’t add up still, Mr.Chidambaram can consider a return to the old system of taxing dividends in the hands of the shareholder. That was the case until a few years ago till the Dividend Distribution Tax (DDT) was introduced. Of course, it could be argued as regressive given that there are small investors in the 10 per cent tax bracket who will also be liable. But then, even in the DDT system, companies do consider the tax liability while deciding the pay-out to shareholders. So, what difference will it make?
In the end, let’s remember that all this is an academic exercise. The collective fates of STT, CTT and DDT are all determined already and come Thursday we will know!
raghuvir.s@thehindu.co.in
Keywords: securities transaction tax, Union Budget 2013-14, Commodities Transaction Tax, Income Tax Act, capital gains tax, P Chidambaram
The article is good. But STT is charged both while buying and selling.
Thereafter we have to pay income tax also. There could be a software
which will recognize when there is a loss when sale takes place and
waives the STT. In my case the stock broker also clubs STT for intraday
and delivery. The rates are different. One has to go and search from
the STT statement for details if a particular transaction results in a
combination of Intraday and Delivery. Say you buy 100 Shares and sell
only 50 on a particular day. Instead it could be left to the asssessee
to calculate STT payable by him.
Disagree with the article.
To make a sweeping generalization that most retail investors invest
only in the short term is wrong.Second even if this class of investors
are in the majority it makes more sense to keep the STT,as it plays
the dual role of curbing speculation to an extent and incentivising
the investor to hold long term. Eventually when the investor would
make real gains by holding long term at least he would not be burdened
by long term capital gains tax.
STT vs CTT
Well if commodity traders absolutely are against the idea of CTT as
that would disrupt volumes , then at least have a super high capital
gains tax ( in the range of 50-60%), as one of their arguments is that
the commodity exchange is mainly used for hedging.Well if you are
really only in the business of hedging then these beneficiaries would
be more than willing to part away with majority of the gains.
Ultimately the real enemy is gold.Anything to incentivize long term
equity investments should be welcomed
Really Good one.
The argument regarding cost-benefit is flawed on two counts: one-
there is no tax collection and remittance charges that the government
has to incur. It is collected on-line and received by the exchequer on
line for the revenues to go into the budget pool of resources. Second,
the seller would like to reduce the loss from the expected gain and
the buyer buys the share for an expected profit. Both can be taxed and
the nominal 0.1 percent is ridiculously low and needs stepping up. In
order that the small investor and the salaried investors are not
burdened, the threshold limit of transaction can be put at Rs.2lakhs.
Commodity Exchanges have not contributed anythng other than speculation. Be it international commodities which has 90% of the volumes is only used for speculation. All the big talk of hedging etc., is only a camaflouge. The exchanges need only transaction revenue. It has to increase its volumes. International commodities esp gold and silver pricing is done in dollars and imported directly on door to door basis. No physical stock in the form of exchange product exists as it gets converted in to jewellery. Hence the exchange product w.r.t to gold and silver in its present form can be used only for speculation. Hence this needs to be taxed. CTT is one of the best ways. Exchanges are more worried about their circular trading done for volumes. Let some sanity prevail in commodity markets. Agri products are rampantly misused in the name of price discovery. This will never contribute in any form for the country. Like alcohol. cigaratte this is harmful. Hence more the tax better for the country
Transactions tax should be retained. This deters milisecond based day trading, which
like gambling is risky and makes the market volatile without creating actual value in
the country.
If we remove such a tax, we can look forward to super-volatile financial scams like in
the US.
Speculation doesn't create wealth or add value to economy. If at all any kind of taxes are justified, then speculation should be the first thing we should look at.
Commodity Futures is completely speculative.It has caused enormous hardship in agri. Very few manipulating and bringing in volatility. Thanks that major daily turnover is in International commodities viz., Gold silver crude oil which is cash settled and has no relavance to Indian demand supply. But on the contrary agri commodities speculators swing the market prices to their whims and fancies - the primary reason for periodical banning. Left in the hands of speculators, the poor and middle class will bleed. Even the developed nations are not immune. They pay the price when Speculators manipulate esp oil. The vested inerests have greater influencce in the government to keep the ball rolling. In India - we all know how equities are manipulated. When caught small fines are levied. Forutnately stock market trades are done between few and does not affect larger economy in India as only 5% is participating.But Commodity trade will affect common man.Whatever hue and cry BAN COMMODITY FUTURES
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