STT reduction – Is it beneficial to retail investors?

STT reduction (Securities Transaction Tax) was announced by honorable finance minister. Budget for the year 2013-14 was presented on 28 Feb 2013. It was very unconventional to announce STT reduction only on equity futures leaving equity options from the STT reduction benefit. After the sharp fall of markets in 2008, many retail investors shifted their trading from futures to options. Trading in options on the long side has benefit of limited risk. The risk is limited to the amount of premium paid. It would have been more beneficial if STT reduction is extended to equity options too.

Before STT reduction, the rate was 0.017 percent. After the proposed STT reduction, the effective rate will be 0.001 percent. For every one lakh of sales in equity futures, investors will benefit by 7 rupees. There is no change in the rates of STT either on equity options or trades done for taking delivery of securities.

Moreover, CTT (Commodity Transaction Tax) is introduced in the budget 2013-14. It will effect commodity turnover on already stagnated volumes negatively. As the CTT (Commodity Transaction Tax) is exempted for Agri commodities and levied only on Non-Agri commodities, MCX will be effected more than NCDEX. In India, MCX is the largest commodity trading exchange for non-agri commodities. NCDEX is the largest commodity trading exchange for agri commodities. Even though, Commodity Transaction Tax was notified earlier too, it was never notified for collection of taxes. Mr Chidambaram mentioned that there is no difference or distinction between trading of derivative market and trading of derivative in commodity market while justifying the introduction of Commodity Transaction Tax.

Commodities Transaction Tax is also levied at the same rate (0.01%) like Securities Transaction Tax on equity futures. Although Commodities Transaction Tax effects volumes on commodities in metals, the profits derived from the transactions will not be counted as speculative transactions. CTT will be allowed as deduction if income from such transactions forms part of the business income. This is very beneficial for short term traders and arbitragers.

With the introduction of STT by Mr chidambaram in 2005, the government exchequer is fatter by 7500 crore per year. The present reduction in STT reduction will be offset to some extent by introduction of Commodity Transaction Tax. STT reduction may not have significant benefit to retail investors.

One notable STT reduction is on mutual funds and ETF Transactions. Mutual fund and ETF reductions at fund counters will now attract 0.001% as STT against earlier rate of 0.25%. Further, Mutual fund and ETF transactions on recognized stock exchanges will attract STT at the rate of 0.001% as against earlier rate of 0.1% (only on sell transactions).

These are proposals in the union budget of 2013-14 and yet to be notified for implementation. Please read para 148 and 149 of budget speech 2013-14 for details.