The STT was introduced in the July 2004 Budget and was opposed by market participants. However, since then the market appears to have taken the tax in its stride given the rising volumes. Of course, the lowering of capital gains tax to 10 per cent and removal of long-term capital gains tax have helped enormously.
In fact, even after the 25 per cent hike in STT, the rates remain relatively small at 0.25 per cent for delivery-based transactions of stocks and mutual funds.
However, day-traders might feel somewhat miffed: they will be affected as they operate on lower margins and the increase in STT from 0.02 per cent to 0.025 per cent will reduce their margins further.
Says S Narayan, managing director, Kotak Securities, "The market expected a reasonable increase but 25 per cent seems to be steep. However in a buoyant market, it will not immediately have an impact on volumes. The arbitratgeurs--those who buy in the cash market and sell in the futures market--and the jobbers (those who continuously trade for small margins) may get hit because they play for a spread. A higher STT increases their cost.
However, most managers were prepared for a rise in STT and are not unduly worried.
As Mihir Vora, head of equities at ABN Amro Mutual Fund, says, "This increase was expected as volumes have grown a lot over the past few years and so have the prices. A L Balasubramanian, head of equities at Birla Mutual Fund, agrees: "It is in line with expectations. As long as markets remain optimistic there won't be anything to worry about."
The finance minister has remained silent on off-market transactions such as open offers in case of share buyback or M&As. At present, such transactions attract capital gains tax as STT is not applicable.
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