Budget 2012: STT- Should It Stay or Should It Go?

As the big Budget stands less than a week away, one of the questions that continue to perplex the expectation list is whether the Securities Transaction Tax (STT) will stay or go away?

On CNBC-TV18's pre-Budget specials, Rashesh Shah, Chairman and CEO of Edelweiss Group, Bobby Parikh, Chief Mentor at BMR Advisors and Madan Sabnavis, Chief Economist at CARE Ratings answer the much debated question.

Below is an edited transcript of the discussion with the CNBC-TV18's Menaka Doshi. Also watch the accompanying videos.

Q: You were part of the delegation that approached the finance minister to make the plea to rationalize STT or do away with it altogether, make the argument in your favour?

Shah: We introduced STT in 2004 and then after that there have been three-four hikes in STT over the years. In 2008, we changed the way STT was accounted for. Earlier it was almost like an advance tax and then it became an expense after 2008 and its impact has been fairly high.

When you add the stamp duties, service tax, exchange cost and the STT, the cost of transactions in India goes high and India has started becoming a very expensive country for financial transactions, from the stock market point of view.
So I think to at least go back to the old treatment which is you do have an STT but allow that as an advance, as an offset. It will ensure compliance, also quite a few individual investors who are not filing for capital gains anyway you are capturing STT from them. So, overall it was slightly more elegant structure and our current request is can we go back to the old structure.

Doshi: There are also to some extent arguments made by the broking community and those interested in the capital markets that in effect the change in rates of STT have exported the cash market to the F&O market and because there is no equal commodities transaction tax, to some extent exported trade from these markets to the commodities markets. Is that an argument you will make as well in favour of doing away with STT?

Shah: I think the export of the Indian markets is a risk for real but it is a phenomenon across the world. I think the risk of exporting our market is real but along with that, the equities to commodities are completely different asset classes. We have equities, currencies, commodities and then fixed income. Overall, I would believe that if you don't have any transaction cost, which creates an artificial speed bump or speed breaker, I think liquidity in the market will go up and a lot of the risk of exporting the markets will go away and the onshore markets will become a lot more robust.

Doshi: On an average we are told that the STT collections have been around Rs 7,500-8,000 crore a year. It is not a very big amount but this is an easy tax to collect, it is low cost, it is efficient, it is non-litigious.

Parikh: That is very little in income tax which is not otherwise litigated so if there is something which comes through on a straight forward basis without causing any battles with the revenue authorities or the courts then for that reason it is desirable.

Doshi: So, you are in favour of not doing away with STT?

Parikh: The fact of the matter is we want investments, we want not only the domestic investors to participate in the market but international investors and hence, we are doing various things to be able to promote that.

So, the most recent example was that we open up the capital markets for QFIs. Hence, it is broad based from only the institutional investors to broader category investors. If there is a global market and if an investor has a choice to invest in any market anywhere in the world then we should be as comparative as the other markets are, if not more if you want to bring investments in.

With all the transaction costs including STT added up, we are quite a high cost market to trade in. That is one point. The reasoning to introduce STT in 2004 was because capital gains tax was materially higher. The finance minister at that point said that we are going to revamp this whole system and we are going to bring down the rates of tax for capital gains and they brought the long-term rates to zero. They brought the short-term rates down to 10 and we are going to substitute and we will sort of make up for the revenue loss by charging an STT.

So, now the rates remain what they were but the STT then went up in successive years. There was a promise and there was something held out but then things changed and then in 2009 we went and then raised the rates on capital gains tax as well. Therefore, short-term capital gains went up from 10 to 15 and long-term one still remains zero.

There is a little bit of a breach of contract in some sense in terms of the logic introduced and then where we have ended up since then. If you introduce a tax or a surcharge or a cess and there is an objective with which it has been introduced then either you have to stay true to that objective or you have to have explanations for why you are deviating from there. We get very little by way of explanations.

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Doshi: Where do you stand in this argument that STT should go to make our financial markets more competitive?

Sabnavis: I am going to sit out on the fence out here because there are two ways of looking at the STT. One is from a point of view of revenue, that