{Securities Transaction Tax + Commodities Transaction Tax + Revenue Foregone} = A Recipe for Illusionary Scam

Are Transaction Tax and Securities Transaction Tax synchronous? If by chance these are used interchangeably, then the rate is not 0.5%, but in accordance to a slab where sale/purchase, or transaction effects on options or futures, where it is valued in premium in the case of options and actual trade price in the case of futures. Moreover, Securities Transaction Tax differs from intra-day to inter-day transactions. Two crucial factors are the distinguishing parameters here: buying securities and selling securities would attract different STT, and is often resorted to avail exemption in case of long-term capital gain. The rate of taxation is determined by the Government. All stock market transactions that involve equity or equity derivatives like futures and options are liable to be taxed under the STT. Now this last sentence is redundant, but points out to commodities and currencies that stand out exempted from STT. If one talks of stocks, bonds and commodities in the same breath, albeit preliminarily, as different from what the governmental figures exhibit – the latter dips the figures, while it should have been higher according to those in the opposition, then clearly commodities and currency trades should have different taxation structure in the stock exchanges. But, that isn’t the case, for commodities are never traded on the stock exchanges, but on the commodity exchanges, and regulated by Forward Markets Commission and not by SEBI. Further, commodity derivatives can be settled by delivery, unlike security derivatives, which could only be settled by payment or receipt of differences. So bearing this differentiation in mind, where does one see commodities vis-à-vis securities under the rubric of revenue receipt?

I understand it has no truck with revenue foregone (it actually has, and I won’t dismiss it so simplistically!! but for brevity I am presuming it merely). Revenue Foregone is more of a myth in regards to the common misunderstanding surrounding the same. Section 5A (1) of the Central Excise Act 1944 empowers the Union Government to lower tariff rates below levels prescribed in the schedules, and are specifically applicable to mass consumable goods and more often than not are not tax sops to corporations. On the other side, Customs duty concessions are mostly for imported goods and used as inputs for exports as defined under Section 25 (1) of the Customs Act, and thus many a times run the risk of being included on the revenue foregone side, while it is mainly to boost India’s exports more competitively on the global market scene. Taken these two, the myth of Revenue Foregone only proliferates either as giveaways to corporations, or as political decisions taken on behalf of corporations, while the real demand from these corporations seldom make such warrants.

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Taxation on the money made via share market trading depends largely on the purpose for which share transactions are done. An individual can trade shares for business purposes or as an investment activity. In both these cases, the STT that is levied by the Government, varies. Why this obsession with STT is the obvious question? Because: STT is fast, transparent and effective. Since tax is levied as soon as the transaction arises, instances of non-payment, wrong payment etc. are reduced to a minimum. The net result of this is, however, it pushes up the cost of transactions. Now, while calculating the estimated potential of revenues from such taxes, the possibility of migration of trade volume is generally not taken into account. Hence, actual revenue mobilized in most cases does not correspond with the estimated potential, because the revenue potential is a function of the elasticity of trading volume with respect to transaction cost/STT spread. On the issue of volatility, things settle down to an ambiguity, and as far as stock exchanges are concerned, one cannot overlook it. The impact of transaction tax on volatility is a function of market microstructures. If market fundamentalists out-number noise traders, then STT will not only affect the latter, but also have a disproportionate effects on the former, leading to a fall in the trade volume and liquidity and inversely rising volatility. This inconclusively questions the veracity of transaction tax and STT, and the two are synchronous with STT and others being merely under different headings of taxation.

Let us leave behind CTT for the time being, as that would complicate matters since we are talking stock exchanges here and not commodity exchanges. Only thing, I’d like to point out then is not using commodities for revenue receipts, if such receipts are generated from stock exchanges as there is a categorical error in bringing them on a similar platform. If one goes into different heads and nomenclatures, what good does it bring about looking at transaction tax stripped off its components is something I find difficult to fathom? Would it not defeat the purpose if one is looking at volume or volumes of trade and revenue receipts under these? Looking now briefly at CTT. First proposed in 2008, it was met with extreme opposition, and CTT was proposed again in the Budget in 2013, but only on Non-Agricultural Commodities such as Gold, Silver, Aluminium, Crude Oil among others. This time the Bill was passed & CTT was levied on Trades in Commodity Futures on & after 1 July 2013. With the introduction of CTT in commodity trading, trading volumes on the MCX and other commodity exchanges in India have seen a dip as high as 50% – 60%. It has also driven away smaller segments of the volume contributors away from the segments since scalping, jobbing, etc have become an unviable and expensive proposition.

 
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