Brokerages hope that FM does not increase STT and LTCG in budget

Finance Minister Nirmala Sitharaman

As the Union budget approaches, brokerage firms are growing concerned that any increase in the Securities Transaction Tax (STT) or long-term capital gains (LTCG) tax could negatively impact trading volumes, affecting their business operations.

Market insiders told Moneycontrol that if STT is increased it will lower the volumes because traders would not trade as frequently as they do now as the overall trading costs would go up. Incidentally, the trading costs are already expected to rise following the uniform exchange fee regime that will come into effect from October 1.

STT is a tax charged on the purchase and sale of securities that are listed on the stock exchanges in India.

“If STT is increased it will mostly be for the F&O segment and not the cash segment,” said a person wishing not to be named. He further added that an increase in STT would reduce market liquidity, as intraday traders significantly contribute to market liquidity.

Shravan Shetty of Primus Partners, however, believes that a 20-30 percent increase in STT will not significantly affect traders, as the tax in absolute terms would still be relatively low. He added that unless the increase is substantial, trading volumes are unlikely to be significantly impacted. He, however, added that if short term capital gain tax is increased with STT, it will have a greater impact on trading volumes.

Currently, STT on the sale of options is 0.0625 percent, which is paid by the seller. On the sale of options in which the option is exercised, it is 0.125 percent, which is payable by the buyer. And on sale of futures, it is 0.0125 percent, which is payable by the seller.

STT is a major contributor to direct tax collections of the government, and increase in STT rates would likely provide a further boost to such revenues, said Surajkumar Shetty, Partner at JSA Advocates and Solicitors.

Currently, the market isn’t anticipating negative surprises in areas like income tax, LTCG, STCG, or STT. However, any changes could have a short-term negative impact, said  Krishna Appala, Sr. Research Analyst, Capitalmind Research.

Triggers ahead

Demat accounts in India still have relatively low penetration compared to major global markets, presenting significant growth opportunities for brokerage firms, according to Ravi Singh, Senior Vice President of Retail Research at Religare Broking.

Financial education is expanding beyond major metropolitan areas, enabling the industry to access previously untapped markets and drive growth, remarked Akshat Garg, Assistant Vice President of Research at Choice Wealth.

The Securities and Exchange Board of India (Sebi) has also been proactive with its regulations, the latest being the implementation of a uniform fee for all broking firms. "The uniform transaction fee could hinder price discovery and trading volumes, potentially being counterproductive," commented Nilesh Sharma, Executive Director and President of Samco Securities.

On July 1, Sebi issued a directive stating that market infrastructure institutions (MIIs)—including stock exchanges, depositories, and clearing corporations—should charge a uniform fee from their members without offering any volume-based rebates.

Exchanges levy a transaction fee on trades conducted on their platforms, charging brokers on a monthly basis. The NSE applies these transaction fees on a slab basis for the month. However, brokers charge their clients daily using the highest slab rate. The difference between the collected fees and the actual fees paid to the NSE is recorded as net profit in the brokers' financial statements.

Analysts note that the regulators' increased focus on reducing derivative trading volumes presents another challenge. Sebi chairperson Madhabi Puri Buch has frequently pointed out that around 90 percent of traders incur losses in futures and options (F&O).

Stocks that could be impacted by potential hikes in Securities Transaction Tax (STT) or Long-Term Capital Gains (LTCG) tax include Motilal Oswal Financial Services, 5paisa, ICICI Securities, Angel One, IIFL Securities, and Geojit Financial Services, among others.

How is the sector looking?
The recent quarters have seen broking firms registering a significant jump in the number of client additions and demat accounts.

The total number of demat accounts increased to 16.2 crore in June 2024, as per a report by Motilal Oswal. New additions in June were pegged at 42 lakh -- the highest monthly gain since February 2024.

Meanwhile, NSE reported a 3.1 percent month-on-month increase in active clients to 4.42 crore in June 2024.

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