Slowdown in the economy and the fall in consumption demand has bolstered hopes that the government will bring about some relief in direct and indirect taxes in Budget 2020 to give a push to consumer spending.
While there is a wider expectation that the Finance Minister Nirmala Sitharaman will give relief in the income tax and long-term capital gains (LTCG) rates, market participants have been assessing the possibility of a tweak in security transaction tax (STT) also.
Many market experts are of the view that the STT may be reduced but not removed completely in this Budget as the reimposition of it will be tough.
Besides, market regulator SEBI's new margin system is also a factor that strengthens the possibility of a cut in STT rates.
"We are of the view that the government may reduce STT because in recent times SEBI has introduced a new margin system. In this new margin system, exchanges have ordered brokers to collect margin even for intraday leverage," said Shrikant Chouhan, Senior Vice-President, Equity Technical Research, Kotak Securities.
"Due to SEBI's new margin system, we think that intraday activity will come down and thereby daily turnover will fall. Eventually, the STT collection will also reduce. So there is no point in keeping STT for a longer time," said Chouhan.
Security transaction tax was first introduced in 2004 after the realisation that actual taxable income for the government was low from the stock market with only short-term capital gain applicable.
Experts point out that the government action on charging 10 percent LTCG tax in FY 2018-19 brought lessor participation in the stock market, especially from retail clients.
Vinod Nair, Head of Research at Geojit Financial Services highlights that section 88E rebate on STT was introduced to avoid double taxation but later withdrawn in 2007. The present government is charging both STT and LTCG.
"The ANMI (The Association of National Exchanges Members of India) has pitched for 50 percent reduction in the STT or restoration of the rebate, Section 88E on the income tax from share trading. Simply put, the STT paid should be treated as advance tax paid," said Nair.
It is anticipated that the government will take policy measures to ensure that the Indian market becomes more investment-friendly in comparison to other emerging markets. Reducing LTCG and STT could be a step in that direction.
The transaction cost in India is too high and LTCG and STT are seen as a sentiment dampener for the market.
"STT should be reduced because it can help to improve trading volumes tremendously which will automatically increase the tax collection. The recent move of SEBI to disallow brokers from providing intraday leverage to traders is causing higher impact cost and a cut in STT may help to boost volume which will automatically reduce the impact cost," said Amit Gupta, Co-Founder and CEO, TradingBells.
Expectations of a tax rebate from the Budget are not new. Every year, the market and public expect a reduction in various direct and indirect taxes. The country's precarious fiscal health may not give the freedom to the government to play with the tax rates.
Vikas Jain, Senior Research Analyst of Reliance Securities is of the view that the STT may not be reduced or removed.
"It is very unlikely that STT would be removed in this Budget. While removal or reduction of STT is expected every Budget, there is no outcome. STT is a direct tax and the government earns revenues as soon as the trade takes place whether the trade is profit or loss. With market volumes scaling new highs every quarter, we do not expect the government to reduce or remove STT in the budget,” Jain said.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
