In a statement today, SEBI chairman UK Sinha said that the securities transaction tax (STT) is too high and needs to be reviewed. Deena Mehta, the managing director of Asit C Mehta Investments Ltd is also of the same view.
Due to the lackluster performance of the market, profits are not able to absorb the STT cost. So any reduction would definitely improve the sentiment, she said exclusively to CNBC-TV18.
However, she doesnt expect this cut to come anytime before the budget. She explains, The government has enough problems on hand to be in a tearing hurry to have a special law introduced. I dont think the government is really going to take so much pain.
Currently, the STT is decided by the government and the market regulator has no direct role in this decision.
Mehta also adds that cutting STT will benefit the divestment plans of the government.
Below is an edited transcript of her interview. Also watch the accompanying video.
Q: Would this statement make a very big difference to market players?
A: Yes. If you see, transaction tax was earlier treated as a tax that could get a rebated on income tax. Now, it is treated as an expenditure item, which is added to your cost of trade. If you look at foreign institutional investors (FIIs), algorithm traders and others who frequently trade in the market, they do lot of hedging. But because of the lackluster market, profits which come from the market are not able to absorb the STT cost. So any reduction in the cost would make the entire algo trading and hedging a lot more profitable than what it is now.
So even though they have mentioned only proprietary traders, there are other frequent traders who do market making or who provide liquidity. For those people, this would definitely be very attractive.
Secondly, our international transaction cost is also very high. The government levies almost 60% of the total cost. So any reduction in that would give a positive sentiment. Of course whether volumes go up or down depends on how the market is performing. So you cannot put a number. Sentiment wise, it would leave more money in the pocket of the investors and maybe that would make people feel that this is viable and that it makes sense to do buy and sell even in the short-term. To that extent, we see a positive thing.
Q: You mentioned that trading cost here are much higher compared to our global peers. To get it in line with what the global benchmark is, how much do you think STT should be cut and whats realistically possible?
A: In my opinion, STT has to be done away with. Why is STT at all? You have got short-term tax, so you dont need STT.
If you look at other countries who have experimented with STT, they have done away with it in the end. Ultimately, the government will see sense, but seeing the fiscal position of the government currently, I think it will come in the budget. The government has enough problems on hand to be in a tearing hurry to have a special law introduced. In fact, I dont think the government is really going to take so much pain.
But of course the lackluster way the markets are performing is a concern for SEBI, market participants as well as the government because people have moved away from equities as an asset class. That should bother the government who has huge disinvestment plans. So keeping the markets sentiment up is something that the government would have to work at and I think this would be a good sweetener for the markets.
Q: Will the upside from giving up this tax be good enough that they would do it in this year at all?
A: Yes. If you see, the government has a disinvestment program of Rs 40,000 crore. In my opinion, it can go up to Rs 1 lakh crore because that is the kind of liquidity which is around in peoples pocket. So the government can do a disinvestment of at least Rs 50-1 lakh crore and the market will just lap this up. For that, you can leave Rs 5,000 or Rs 7,000 crore. It makes good business sense if the market stays very attractive and people atleast look at the prices.