It is interesting to see the Securities and Exchange Board of India (SEBI) taking up the cause of ‘retail investors’ by seeking a ‘phased’ rollback of the Securities Transaction Tax (STT). SEBI apparently told finance minister Pranab Mukherjee that getting rid of the STT would be one way to improve retail participation in the market. Will it? Actually the STT has always attracted strong views which had little to do with what retail investors want. Of course, most people would happily support a withdrawal of any tax. But will the STT be removed or simply replaced with something worse? A bunch of economists who dominate policymaking on capital markets have been strong opponents of the STT. The argument is that tax on expenditure ought to be avoided. This is true but the expenditure tax that really causes enormous hardship is the Fringe Benefit Tax. Economists support Service Tax, though it has increased the circulation of black money, especially on small transactions, because almost everybody avoids the tax and prefers to pay cash. Yet, media reports suggest that the government is getting ready to increase service tax to 12%.
Coming back to the STT, it is directly deducted by the bourses from transaction charges paid by investors and credited to the government. It’s neat. No retail investor has ever complained about it. Investors, in general, would instead want the high transaction charges of depositories and stock exchanges to be lowered. The National Stock Exchange as well as the National Securities Depository Ltd work on extremely high operating margins of over 52%. There is ample scope for them to reduce their charges, but they remain hugely profitable by benchmarking their costs to those of the developed markets. Investors are also put off by the high cost of entering the capital market which takes the form of account-opening charges for brokerage and depository accounts, extensive paperwork involved in both cases and the margins collected by brokerage firms and deposits by depository participants (DPs) at the time of opening accounts. According to investors, they pay up as much as Rs10,000 merely in preparation of entering the capital market, even without investing a single rupee.
Another serious concern that has not been addressed for the past three years is the recognition of short-term and long-term capital gains tax for traders. The decision on whether a certain income is speculative (and taxed at the highest rate) or a capital gain is entirely at the discretion of the assessing officer. This has turned into a big tool for harassment. Despite representations from industry groups, the government has made no move to ensure clarity on these issues. Curiously, media reports do not mention SEBI having taken up these issues with the finance ministry.