From a capital market perspective, the Union Budget 2016-17 touched upon the issue of securities transaction tax, dividend distribution tax and the holding limit for foreign exchanges in Indian bourses.
The equity market reacted in a volatile manner with the benchmark Sensex losing 659 points during the day before recovering partly. After touching an intra-day low of 22,494.61, the Sensex closed at 23,002, down 152.30 points. The broader Nifty of the National Stock Exchange (NSE) closed the day at 6,987.05, down 42.70 points.
A review of the securities transaction tax (STT) was on the market wish list and the Finance Minister did not disappoint though market players expected more. Arun Jaitley announced an increase in the quantum of securities transaction tax (STT) on options contracts from the current 0.017 per cent to 0.05 per cent.
Essentially, the Finance Minister has increased the tax on speculative trading in the derivatives segment while leaving the STT on investments unchanged. Incidentally, trading in options contracts constitutes the majority in the cumulative derivatives segment turnover.Tax on dividends
In another move that spooked the markets to a large extent, the Budget laid down that dividend income in excess of Rs. 10 lakh would be taxed at 10 per cent. The silver lining was the limit of Rs. 10 lakh that effectively insulates small investors from the new tax.
Nithin Kamath, founder & chief executive officer, Zerodha, a discount brokerage entity, is of the view that the new tax on dividend is “something that serious long-term inventors will worry about.”
The government did not disappoint the stock exchanges though by allowing overseas bourses to hold 15 per cent stake in Indian exchanges. Currently, foreign stock exchanges are allowed to hold only 5 per cent stake in Indian bourses.
“The investment limit for foreign entities in Indian stock exchanges will be enhanced from 5 per cent to 15 per cent on par with domestic institutions. This will enhance global competitiveness of Indian stock exchanges and accelerate adoption of best-in-class technology and global market practices,” stated the budget documents.Move welcomed
Welcoming the government move, the BSE spokesperson said the decision was expected to improve the functioning of Indian stock exchanges and bring them on par with the best exchanges in the world while helping in attracting more investments in India by creating stronger links with the foreign exchanges.
As part of its attempts to encourage more International Financial Services Centres (IFSC) like the Gujarat-based GIFT City, the Finance Minister said transactions on equity or commodity exchanges in such zones would not attract any STT or even commodities transaction tax (CTT).
Incidentally, the commodity market turnover has taken a hit ever since the government mandated the levy of CTT on July 1, 2013 on all non-agricultural commodities. The commodity market participants have been demanding the removal of CTT since long.