The mutual fund industry is not so happy with the new transaction tax structure.
The new transaction tax structure will fetch the government a little more than Rs 1,000 crore (Rs 10 billion) in 2004-2005.
The exchequer is likely to get Rs 560 crore (Rs 5.6 billion) from the 0.15 per cent tax on delivery-based transactions, while the 0.01 per cent tax on derivatives trades should net the government another Rs 244 crore (Rs 2.44 billion).
Day traders, arbitrageurs and jobbers will cough up Rs 218 crore (R 2.18 billion). Business Standard Research Bureau has worked out these estimates based on the total turnover on the Bombay Stock Exchange and the National Stock Exchange.
The critical assumption is that the cash segment turnover will increase by around 60 per cent, from Rs 15,93,581 crore (Rs 15,935.81 billion) in 2003-2004 to Rs 25,49,730 crore (Rs 25,497.30 billion) in 2004-2005.
The turnover in the F&O segment is estimated to increase by 70 per cent, from Rs 21,306,49 crore (Rs 21,306.49 billion) to Rs 36,22,103 crore (Rs 36,221.03 billion) in 2004-2005 while delivery-based buying will increase from Rs 3,50,676 crore (Rs 3,506.76 billion) to Rs 5,61,080 crore (Rs 5,610.80 billion).
But market players had no time to contemplate the loss of revenues as they savoured their moment of victory. Tarun Shah, chief executive officer, SSKI Securities, said, "This is the best thing that could happen to the equity markets. The tax breaks in terms of capital gains coupled with the reduction in transaction tax will boost inflows into the capital markets."
He also pointed out that the tax would weed out inefficient day traders -- only traders who trade intelligently will remain in business. "Since the transaction tax can be set off against their business income, it comes to zero tax for this segment," he said.
Motial Oswal, chairman and managing director, Motilal Oswal Securities, said, "The proposed changes in the transaction tax are more or less in line with market expectations and should work positively."
Leading BSE broker Ramesh Damani added: "The finance minister's move to reduce the transaction tax on non-delivery trades and to scrap transaction tax on debt trades is a very positive and a pragmatic step. I expect the markets to open with a positive gap and the positive trend in the mid cap counters to continue."
There was some confusion among the smaller day traders and abitrageurs over how to categorise themselves.
But the mutual fund industry is not so happy. While the industry is relieved that the finance minister has removed discriminatory tax treatment for mutual fund units, the industry is left to contend with a 0.15 per cent transaction tax and the possibility of tax-induced inflows and outflows. Consequently, the industry is planning to hike entry and exit loads to deter short-term inflows and outflows.
The industry had earlier protested that the removal of short-term capital gains on traded securities tilted the balance away from mutual fund units, which are not traded on the exchanges. But it had not bargained for the transactions tax.
Sanjay Prakash, chief executive officer of HSBC Mutual Fund said, "We are glad the parity has been restored and Wednesday's announcement has placed us on an even keel with equity investments."
Naval Bir Kumar, managing director of Standard Chartered Mutual Fund added: "The status quo with regard to debt funds and investments in debt schemes has been maintained." Investments in debt instruments have been exempt from the transaction tax. However, investments in debt funds will attract short-term capital gains at 35 per cent and long-term gains at 20 per cent (without indexation).
The transaction tax will have to be borne eventually by investors in mutual funds.
The flip side of the story is that equity schemes are expected to see an inflow of short-term money. Prakash hints that funds will be looking at increasing their entry loads and imposing exit loads, in order to discourage short-term exits. At present equity schemes have zero exit loads while entry loads range between 1.5 per cent and 2.5 per cent.
The chief marketing officer of a leading private sector fund house said, "Yes, we expect to see more short-term investors now coming in." Equity schemes are largely retail money but most of it is due to subscription by high net worth individuals who are looking for short-term returns.