Market insiders expect STT hike in Budget 2024, expect HFTs to be hit hard

The Economic Survey event went so far as to say that the speculative nature of derivatives trading has "no place in a developing country" like India.

Market players are expecting the Finance Minister Nirmala Sitharaman to announce a hike in securities transaction tax (STT) for the futures and options (F&O) segment in the coming Union Budget.

They see a strong possibility because of the concerns raised by the capital markets regulator recently and even by the Economic Survey 2023-24 issued on July 22.

At a recent press conference, Securities and Exchange Board of India (SEB) chairperson Madhabi Puri Buch said that turnover in index options in premium terms had gone up from Rs 4.5 lakh crore in 2018 to Rs 140 lakh crore in 2024. The overall turnover in the derivatives segment had risen from Rs 210 lakh crore in 2018 to Rs 500 lakh crore in 2024. And the share of individual investors was up from 2 percent to 41 percent in the same period.

Also read: Speculative trading has no place in a developing country like India: Economic Survey

The Economic Survey event went so far as to say that the speculative nature of derivatives trading has "no place in a developing country" like India. The survey report pointed out that capital markets must play their theoretically assigned role of directing savings to productive investments. This, the survey stated, is not just in the national interest but is also an act of self interest.

ALSO READ: Union Budget 2024 Live Updates

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. While most market participants refused to speculate on the extent of the STT hike, a couple ventured that it could be even up to 10 percent increase from now.

There have been industry representations made in late June to the Finance Minister to raise STT on derivative trades undertaken by high-frequency traders, said Suresh Swamy, partner at Price Waterhouse & Co LLP

"So far, the government has not formally indicated any intentions to increase STT in the budget. One would need to wait for the budget to be announced to see if there are any hikes to the STT rates,” he added.

Ayush Agrawal, a SEBI-registered research analyst, said that while nothing is certain, "there are chances of an increase because the regulator wants to discourage derivative trading".

A seasoned trader with decades of experience, Rajesh Srivastava too believes that any taxation intervention to prevent speculative trading will most likely in the derivatives segment.

The government could also be driven by the need to shore up revenues, said Srivastava, especially since the recent tax collections have been impressive. Data released recently by the Central Board of Direct Taxes (CBDT) showed that the collection via STT between April 1 and July 11 had shot up by 128 percent year-on-year. The government collected Rs 16,634 crore during this period in FY25 versus Rs 7,285 crore in FY24.

Nitin Mangal, founder of Trudence Capital, too said that a rise in the tax is likely because of the government’s inclination to raise revenues through taxation. “For this they need to either widen the GST (goods and services tax) net or increase the STT. Therefore, I think there is a high likelihood that both will happen and that they will raise the STT by another 10 percent.

High-frequency traders beware

If you are a high-frequency trader or an algo trader or an intraday trader, then there is reason to worry.

Agrawal said that any increase "would target the high-volume trading activities that dominate the Indian derivatives market".

Srivastava said, "Intraday traders would be significantly impacted due to increased transaction costs which will lead to lower profitability."

He added that algo traders, who rely on high-frequency adjustments, too would be badly hit.

He said, "They would be forced to shift to strategies with fewer adjustments. Consequently, this is also likely to slow down the adoption of automation in trading."

PwC’s Swamy pointed out that since the previous hike in STT in the derivatives segment was “very recent”, another hike so soon may impact active traders. He said, “STT rates on cash equities have been stable for quite some time now. The last amendment was in 2012, when the STT rate on delivery-based equities was reduced from 0.125 percent to 0.1 percent on sale and purchase of equity shares. On the other hand, it is noteworthy that the hike in STT rates on the derivatives segment was as recent as the Finance Bill, 2023, where a 25 percent hike was implemented on sale of options (from 0.05 percent to 0.0625 percent) and sale of futures (from 0.01 percent to 0.0125 percent).”

Market veterans also pointed out how it will affect liquidity in the market.

Harsh Roongta, a SEBI-registered investment advisor and founder of Fee Only Investment Advisors, said "taxation is a blunt instrument".

"It will affect everyone," he said. Roongta is of the opinion that the market regulator has more nuanced instruments to control speculative trading in the form of interventions like it is considering now through its expert committee recommendations.

Both Roongta and Srivastava feel that increased costs will lead to a drying up of liquidity in the derivatives segment.